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levelopment  ot  Corporation 
Taxation  in  the  State  of  New  York 


A  THESIS 


Presented  to  the  Faculty  of  the  Graduate  School 

of  Cornell  University  for  the  Degree  of 

DOCTOR  OF  PHILOSOPHY 


MERLIN     HAROLD     HUNTER 


EXCHANGE 


THE  DEVELOPMENT  OF  CORPORATION 
TAXATION  IN  THE  STATE  OF  NEW  YORK 

A  THESIS 

Presented  to  the  Faculty  of  the  Graduate  School 

of  Cornell  University  for  the  Degree  of 

DOCTOR  OF  PHILOSOPHY 

BY 

MERLIN  HAROLD  HUNTER 


A      -4 


PUBLISHED  BY  THE  AUTHOR 

URBANA,  ILL. 

1917. 


\\V 


PRESS    OF 

THE  CALLIHAN   &  STOTTLEMIRE  CO. 

CAMBRIDGE.    OHIO 


/Eac. 


0<?r?f^ 


INTRODUCTORY  NOTE 


The  purpose  of  this  study  is  to  trace  in  outline  the 
development  of  the  system  of  taxing  corporations  in  the 
state  of  New  York.  Some  consideraion  is  also  given  to 
problems  which  have  arisen  under  the  present  tax  laws. 
Special  emphasis  has  been  put  upon  the  legislative  history 
of  corporation  taxes  and  upon  the  judicial  interpretation 
of  the  stautes  enacted.  From  among  the  great  mass  of 
statutes  and  court  decisions  bearing  upon  the  subject  I 
have  tried  to  select  the  more  important,  and  to  discuss 
them  in  such  a  way  as  to  show  the  general  lines  along 
which  the  tax  system  has  devoloped.  I  have  also  tried 
to  show,  where  possible,  the  more  important  influences 
which  weighed  with  courts  and  legislature.  The  conclu- 
which  have  been  drawn  from  laws,  cases,  and  reports 
cited  in  the  text  are,  in  general,  bolstered  up  by  many 
which  are  not  cited. 

In  the  preparation  of  the  study,  I  have  been  materially 
assisted  by  professor  Allyn  A.  Young  of  Cornell  Univer- 
sity, under  whose  direction  the  work  was  done.  Pro- 
fessor T.  S.  Adams  of  Yale  University,  Prof.  C.  O.  Rug- 
gles  of  Ohio  State  University,  and  Professor  J.  R.  Turner 
of  New  York  University  have  also  given  valuable  sug- 
gestions. The  services  of  others,  who  have  assisted  by 
reading  the  manuscript  and  proof,  I  wish  also  to  acknow- 
ledge. 

M.   H.    HUNTER 

Urbana,  111.,  September,  191 7. 


m 


387317 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/developmentofcorOOhuntrich 


TABLE  OF  CONTENTS 

CHAPTER  I 

The  General  Taxation  of  Corporations  Before  1880— Page  1 

Personal  property  tax  developed  early  in  the  Colonial  history — 
Early  charters  to  turnpike  companies  contained  regulatory  provis- 
ions— The  law  of  1823  was  the  first  to  specifically  tax  corporations 
— By  laws  of  1827-28  a  corporation  in  receipt  of  no  profit  was  not 
taxable — Many  commutation  provisions  are  found  in  the  early  laws 
— After  much  litigation  the  legal  nature  of  a  corporation  was  es- 
tablished— The  meaning  of  "net  income"  caused  much  litigation — 
Changes  were  made  in  taxing  corporations  in  1853 — Classification 
was  soon  introduced — -Under  the  commutations  allowed  much  fraud 
was  practiced — Much  litigation  was  caused  by  the  law  of  1853 — 
Many  inequalities  resulted  from  the  assessments — Officials  pro- 
posed remedies  but  without  immediate  results — Legislature  aroused 
to  action  in  1879 — Law  modified  in  1880. 

CHAPTER  II 
The  General  Taxation  of  Corporations— Page  21 

The  law  of  1880  is  the  basis  of  the  annual  franchise  tax — By 
law  of  1880  corporations  were  classified  according  to  dividends  paid 
— Not  all  corporations  were  included  in  the  law — Defined  as  a  tax 
on  franchise  in  1881 — Action  of  the  legislature  was  criticised  by 
the  press — The  changes  of  1880  were  received  favorably  by  State 
officials  yet  other  reforms  were  advocated — State  Assessors  give 
new  ideas  concerning  corporate  taxation — Low  tax  rate  attributed  to 
corporation  taxes — Litigation  which  arose  firmly  established  the  law 
— Injustice  to  foreign  corporations  removed  by  taxing  only  the 
part  of  the  capital  employed  in  the  state — Tax  system  condemned 
because  of  the  unjust  burden  upon  real  estate — Question  of  taxing 
indebtedness  was  much  discussed — Organization  tax  was  adopted 
in  1886 — Organization  tax  modified  by  the  courts  and  the  legisla- 
ture— Some  corporations  evaded  full  share  of  taxes — Courts  were 
often  called  upon  to  interpret  the  laws — The  law  of  1880  as  amend- 
ed in  1896  and  1906  constitutes  the  present  annual  franchise  tax — 
Some  corporations  are  exempt  from  the  annual  franchise  tax. 
Courts  have  not  always  been  consistent  in  deciding  questions  aris- 
ing under  the  law. 

CHAPTER  III. 

Problems  and  Difficulties  of  the  General  Tax  on 
Corporations. — Page  39. 

The  law  of  1880,  by  introducing  indirect  taxation,  attempted 
to  eliminate  the  evils  that  existed  under  direct  taxes — System  suc- 
cessful from  standpoint  of  revenue   and  cost  of  collection — Dim- 


culty  exists  in  determining  the  value  of  capital  stock — Complexity 
of  the  law  is  a  disadvantage — In  some  cases  heavy  burden  falls  on 
real  estate — Methods  employed  for  dealing  with  delinquent  cor- 
porations not  satisfactory — System  has  been  criticised  because  the 
same  burdens  have  not  been  placed  upon  corporations  and  individuals 
— The  assessment  of  corporate  property  for  local  purposes  presents 
many  difficulties — The  valuation  of  real  estate  constitutes  a  special 
problem — Method  prescribed  for  assessing  capital  stock  for  local 
purposes  too  complex  to  be  used — Tax  officials  and  organizations 
have  asked  for  modifications — Organization  tax  opposed  because  it 
"drives  capital  from  the  state" — Separation  of  state  and  local  reve- 
nues not  wise — Bill  introduced  in  1881  proposed  a  stock  transfer 
tax — Stock  transfer  tax  adopted  in  1905 — Tax  on  transfers  of  stock 
not  class  legislation — Evasions  have  been  checked  but  not  elim- 
inated by  changes  in  the  stock  transfer  tax  law — Any  increase  in 
rate  should  be  left  to  meet  emergency. 

CHAPTER  IV 
The  Taxation  of  Foreign  Corporations. — Page  57 

Treatment  of  foreign  corporations  has  varied  widely — First 
laws  affecting  foreign  corporations  applied  only  to  insurance  com- 
panies— Law  of  1851  was  favorable  to  foreign  capital — Courts  inter- 
preted the  early  law  at  many  points — Retaliatory  insurance  in- 
troduced in  1865 — Foreign  corporations  evaded  the  tax  by  estab- 
lishing agencies  in  the  state — Foreign  manufacturing  concerns  to 
a  great  extent  escaped  taxation — Legislature  modified  the  law  in 
1880 — Corporations  sought  to  defeat  the  new  legislation  and  much 
litigation  resulted — The  law  proved  practically  a  dead  letter — Sys- 
tem of  taxing  foreign  bankers  modified  in  1894 — License  tax  im- 
posed in  1895 — Foreign  insurance  taxation  modified  in  1892 — Or- 
ganization or  license  tax  was  productive — Modifications  in  the  laws 
caused  litigation — Much  foreign  capital  escapes  which  the  law  in- 
tends to  tax — Governor  and  State  officials  asked  for  modifications — 
Law  of  1896  basis  of  present  tax  on  foreign  corporations — Two 
conflicting  policies  have  been  followed  in  dealing  with  foreign  cor- 
porations— Equality  of  tax  burden  should  be  secured  as  between 
foreign  and  domestic  corporations — Same  basis  should  be  used  for 
both  domestic  and  foreign  corporations. 

CHAPTER  V 

Taxation   of   Insurance  Companies  and   Manufacturing 
Corporations.— Page  77 

Domestic  insurance  companies  first  taxed  under  the  general 
tax  laws — Rise  of  mutual  companies  created  a  new  problem — Opin- 
ion advanced  in  1879  that  insurance  required  distinct  treatment — 
Tax  officials  asked  for  modifications  and  the  legislature  responded 
in  1880 — Tax  did  not  prove  productive — The  determination  of  the 
surplus  of  insurance  companies  proved  difficult — Variance  of  opin- 
ion as  to  what  extent  life  insurance  companies  should  be  taxed — 
From  the  nature  of  insurance  companies  they  should  fit  in  with 
the  general  tax  system — Tax  on  gross  premiums  most  used — Tax 
on  gross  premiums  open  to  valid  objections — Systems  used  do  not 

VI 


meet  the  theoritical  and  practical  tests  of  justice — Policy  of  en- 
couraging manufacturing  interests  has  been  followed — More  len- 
iency than  has  been  shown  has  been  advocated — Law  of  1880  made 
concessions  to  manufacturing  companies — Manufacturing  capital 
is  assessed  locally  for  local  purposes — Manufacturing  companies 
should  bear  their  share  of  the  public  burden — Problem  is  that  of 
taxing  capital  in  general. 

CHAPTER  VI. 
Taxation  of  Banks. — Page  94 

Bank  stock  taxed  under  the  first  law  taxing  corporations — 
Complaints  were  taken  directly  to  the  legislature — Banks  consid- 
ered corporations — Bank  surplus  taxed  under  the  law  of  1853 — 
Most  radical  change  in  bank  taxation  came  in  1865 — Difficulty  arose 
from  taxing  capital  invested  in  United  States  securities — Law  of 
1865  declared  unconstitutional — Debts  could  not  be  deducted  from 
assessments — Decisions  of  the  courts  were  unexpected — State  offi- 
cials condemned  the  inequalities  in  bank  assessments — Assessment 
in  conformity  to  the  law  would  have  caused  inequality — Bank  capi- 
tal was  reduced — Bill  for  the  relief  of  banks  defeated  in  the  as- 
sembly in  1887 — State  officials  criticise  the  severe  bank  taxation — 
The  dissatisfaction  was  not  merely  a  clamor  stirred  up  by  the 
banking  interests — In  1878  court  held  that  debts  must  be  deducted 
from  assessments — "Moneyed  capital  in  the  hands  of  individuals" 
defined  by  the  court — Law  changed  in  1901.  Recent  complaints  have 
come  from  interests  located  without  the  state — Present  system  of 
taxing  banks  considered  satisfactory — Banks  should  not  be  taxed 
so  much  as  to  hinder  capital  seeking  that  form  of  investment — 
The  taxation  of  bank  deposits  a  much  discussed  question — The 
taxation  of  savings  banks  has  had  a  separate  hstory — Dfficulty  has 
arisen  in  determining  the  value  of  the  surplus — The  taxation  of 
deposits  in  saving  banks  has  been  much  discussed — Small  tax  on 
deposits  would  work  but  little  hardship — Trust  companies  have 
been  treated  differently  from  other  banks. 

CHAPTER  VII. 

Taxation  of  Railroads  and  Other  Public  Service 
Corporations. — Page  122 

For  many  years  public  utility  companies  were  taxed  under  the 
general  tax  law — Favoritism  shown  to  state  projects — Difficulties 
arose  in  assessing  the  property  of  railroads — Railroads  removed 
from  the  scope  of  the  general  tax  system  in  1857 — General  property 
tax  used — Special  Tax  Commission  condemned  the  system  in  1871 — 
Telegraph  companies  were  assessed  only  on  their  personal  prop- 
erty— The  taxation  of  public  utilities  was  generally  criticized — 
Courts  differed  in  the  methods  prescribed  for  assessing  real  estate 
— System  for  taxing  transportation  companies  changed  in  1882 — 
This  system,  as  modified  in  1896,  is  practically  the  present  system — 
Much  litigation  has  arisen  but  mostly  in  connection  with  local  as- 
sessments— Courts  alternated  between  cost  of  reproduction  and 
earning  power  in  formulating  rules  for  valuation — Taxation  for 
local  purposes   still  the  cause  of  much  complaint — Gross   earnings 

VII 


tax  partially  used  in  New  York  and  has  advantages — Ontario  Tax 
Commission  upheld  the  gross  earnings  tax  for  railroads — Some 
state  tax  commissions  advocate  the  gross  earnings  tax — Gross  earn- 
ings tax  has  serious  difficulties  and  some  states  have  given  it  up — 
A  tax  on  net  earnings  has  been  advocated  by  some  authorities — 
The  net  earnings  tax  has  serious  difficulties — The  ad  valorem 
method  depends  on  the  competency  of  the  board — Some  form  of  unit 
taxation  would  prove  more  satisfactory  than  the  system  now  in 
use  in  New  York. 

CHAPTER  VIII. 

The  Special  Taxation  of  Public  Service 
Corporations. — Page  151 

Governor  Roosevelt  primarily  responsible  for  the  special  fran- 
chise tax — The  bill  as  first  passed  was  defective  yet  the  governor 
refused  to  veto  it  but  called  a  special  session  of  the  legislature  to 
amend  it — The  special  session  was  unpopular  with  the  legislators 
and  the  public — Special  franchises  are  assessed  as  real  estate — 
The  press  was  generally  favorable  to  franchise  taxation — Special 
franchises  are  taxed  as  real  estate  to  get  around  difficulties  in  the 
general  tax  law — The  assessment  and  valuation  of  the  special  fran- 
chise has  proved  particularly  difficult — Counsel  designated  by  the 
Attorney  General  prescribed  a  method  for  valuation — Board  of  Tax 
Commissioners  at  first  met  with  many  difficulties  and  were  criticised 
— All  special  franchises  of  less  than  250  feet  in  length  were  removed 
from  the  action  of  the  law  but  later  those  in  incorporated  villages 
were  added — The  Tax  Commissioners  approved  the  law  as  a  matter 
of  justice — The  statute  has  caused  an  enormous  amount  of  litiga- 
tion— Corporations  were  criticised  for  contesting  the  law — Tax 
Commissioners  were  given  the  power  in  1911  to  equalize  special 
franchise  assessments  with  other  assessments.  Statute  has  proved 
to  be  one  of  the  most  arbitrary  and  complicated  parts  of  New 
York's  tax  system — Many  difficult  questions  arise  in  applying  the 
law — Companies  were  exploiting  the  public  through  the  franchise 
and  no  weapon  seemed  so  readily  available  as  taxation — Regula- 
tion by  a  public  service  commission  is  a  method  more  recently  used 
to  secure  justice — Public  utility  property  should  be  taxed  to  the 
same  extent  as  other  property.  Should  have  some  system  of  unit 
taxation  assessed  by  a  central  board. 

CHAPTER  IX. 

Summary  of  New  York  Laws  Taxing 
Corporations. — Page  169. 


VIII 


CHAPTER  I 

THE  GENERAL  TAXATION  OF  CORPORA- 
TIONS BEFORE  1880. 

DEVELOPMENT  OF  GENERAL  PROPERTY  TAX 


It  will  be  profitable  to  sketch  briefly  the  general  system 
of  taxation  in  New  York  before  a  special  tax  was  im- 
posed upon  corporations.  We  find  that  the  personal  prop- 
erty tax  developed  almost  with  the  beginning  of  the  col- 
ony.1 Under  the  Dutch  rule  Peter  Stuyvesant,  as  early 
as  1654,  succeeded  in  having  an  "honest  and  fair  tax" 
placed  upon  "land,  houses  or  lots  and  milch  cows  or  draft 
oxen."  The  tax  was  more  highly  developed  on  Long 
Island  than  elsewhere.  During  the  English  occupancy  of 
the  colony,  1664- 1674,  the  Duke  of  York  enforced  a  prop- 
erty tax  upon  Long  Island,  and  when  the  Dutch  regained 
ascendency  funds  were  secured  by  taxing  the  wealthiest 
citizens.  This  class  included  all  who  possessed  more  than 
two  hundred  dollars. 

The  results  of  these  unsystematic  attempts  were  only 
partially  successful.  After  the  establishment  of  the  colon- 
ial assembly  in  1683,  tne  general  property  tax  was  de- 
veloped in  a  more  uniform  way.  The  principle  of  assess- 
ing every  person  in  proportion  to  his  aggregate  property 
was  the  fundamental  rule.  In  the  "tax  and  assessment" 
law  of  1683 — the  first  of  its  kind — provision  was  made 

1  For  an  excellent  general  history  of  these  matters,  see  J.  C. 
Schwab,  "History  of  the  New  York  Property  Tax,"  Publications  of 
American  Economic  Association,  Vol.  V. 


2         DEVELOPMENT   OF  CORPORATION   TAXATION,   STATE  OF   NEW   YORK 

tor  trie  election  of  assessors,  the  assessment  of  property, 
and  the  election  of  a  treasurer.  The  method  for  disburs- 
ing the  money  raised  was  also  included.  Two  of  the  dif- 
ficulties of  the  general  property  tax  soon  appeared — dis- 
honesty of  officials,  and  incorrect  and  partial  assessment 
of  property.  In  less  than  ten  years  after  the  passage  of 
the  act  the  assembly  appealed  to  the  governor  for  some 
method  of  equalizing  assessments.  The  interference  of 
higher  authorities,  and  the  establishment  of  flat  rates  of 
assessment  for  different  classes  of  property  were  used  to 
improve  matters.  Fundamentally,  however,  the  law  re- 
mained the  same  throughout  the  eighteenth  century,  al- 
though various  amendments  indicate  that  the  operation 
of  the  law  was  not  thoroughly  successful. 

The  property  tax  in  New  York  was  from  the  first 
couched  in  general  terms,  and  hence  was  in  principle  a 
true  "general  property  tax."  In  most  of  the  other  col- 
onies certain  specific  objects  of  taxation  were  defined,  and 
the  value  regulated  by  law.2  Where  land  was  taxed  it 
was  divided  into  different  grades,  and  so  were  horses, 
cattle,  etc.  The  necessity  of  holding  land  before  being 
admitted  to  the  full  rights  of  citizenship,  and  the  provision 
of  the  federal  constitution  forbidding  states  to  levy  export 
or  import  duties,  were  conditions  which  helped  to  tighten 
the  grip  of  the  general  property  tax.  This  tax  became  so 
thoroughly  intrenched  that  when  any  new  object  of  taxa- 
tion appeared,  it  was  inevitable  that  an  attempt  should 
be  made  to  put  it  under  the  property  tax.  When  the  cor- 
porate form  of  organization  began  to  become  important, 
the  problem  of  taxation  naturally  appeared  to  be  one  of 
merely  extending  the  application  of  the  general  property 
tax. 

EARLY  TREATMENT  OF  CORPORATIONS 

Before  any  general  law  relating  to  the  taxation  of 
corporations  was  enacted,  there  were  a  number  of  import- 
ant developments  in  the  policy  of  the  state  towards  this 
problem.    Turnpike  and  bridge  companies  formed  by  far 

2  In  Rhode  Island,  Delaware  and  Maryland,  as  well  as  in  New 
York,  the  general  property  tax  was  in  force. 


DEVELOPMENT  OF  GENERAL  PROPERTY  TAX  3 

the  largest  proportion  of  early  business  corporations. 
Most  of  the  laws  granting  charters  to  such  companies 
contained  regularatory  provisions,  which,  while  not  im- 
posing taxes,  required  certain  payments  from  the  com- 
panies.3 

Before  1823  there  was  no  law  which  specifically  taxed 
corporations.  The  tax  law  of  1800,  however,  had  pro- 
vided that  shares  should  be  deemed  personal  property.4 
The  turnpike  law  of  1807  likewise  declared  the  shares  of 
such  organizations  to  be  personal  estate.5  We  have  evi- 
dence, moreover,  that  corporations  were  taxed  under  the 
general  property  tax  law.  In  the  case  of  The  People  vs 
Ithaca  Insurance  Company,9  Martin  Van  Buren,  Attor- 
ney General,  cited  the  case  of  the  Clinton  Woolen  Manu- 
facturing Company  vs  Morse  and  Bennett,1  and  said  that 
in  that  case  the  opinion  was  given  "that  under  the  act  for 
the  assessment  and  collection  of  taxes8  corporations  are 
liable  to  be  taxed  for  property  owned  by  them;  yet  the 
act  speaks  only  of  persons  liable  to  be  assessed  and  the 
term  corporation  is  not  used  at  all."  Thus,  in  the  first 
definite  recognition  of  the  corporation  as  an  object  of 
taxation,  it  seems  to  have  been  dealt  with  in  exactly  the 
same  way  as  a  natural  person.  Doubtless  the  litigation 
arising  from  this  method  of  handling  the  problem  was  a 
factor  leading  to  the  passage  of  the  law  of  1823 — the  first 
statute  dealing  specifically  with  the  taxation  of  corpora- 
tions. 

8  The  first  act  of  this  kind  was  one  creating  the  Quaker  Hill  Turn- 
pike Company,  (Chap.  LXVI,  1802).  It  provided  for  inspectors  to 
be  appointed  by  the  Governor,  and  paid  by  the  company.  Regula- 
tory provisions  are  found  in  practically  all  laws  granting  such  char- 
ters before  1807.  In  that  year  a  general  turnpike  company  law  was 
enacted.  This  provided  for  the  appointment  of  commissioners  to 
lay  out  the  road,  the  valuation  of  private  property  by  assessors  ap- 
pointed by  the  county  judge,  and  for  commissioners  to  investigate 
the  conditions  of  the  road.  All  of  these  were  to  be  paid  by  the 
company  at  specified  rates. 

4  New  York  Statutes,  1800,  Chap.  79. 

5  New  York  Statutes,  1807,  Chap.  38. 

*  The  People  vs  Ithaca  Insurance  Company,  15  Johnson,  382. 

7  This  case  was  not  reported.  It  was  tried  in  the  October  term, 
1817. 

8  New  York  Statutes,  1813,  Chap.  52. 


4  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

THE  TREATMENT   OF   CORPORATIONS   BEFORE    l88o. 

The  general  tax  law  of  18239  contained  provisions 
which  dealt  specifically  with  the  taxation  of  corporations. 
All  incorporated  companies  receiving  a  regular  income 
from  the  employment  of  capital  were  defined  as  "persons" 
within  the  meaning  of  the  act,  and  were  to  be  assessed 
and  taxed  in  the  same  manner  as  individuals.  The  sec- 
retary or  treasurer  of  the  company  was  to  deliver  to  the 
assessor  in  the  town  or  ward  where  the  office  or  place 
for  transacting  the  business  was  located,  a  list  showing 
the  real  estate  occupied  by  the  company,  the  amount  of 
capital  actually  paid  in  or  secured  to  be  paid  in,  except 
the  amount  invested  in  real  estate,  and  the  amount  of 
stock  held  by  the  state  or  any  charitable  or  literary  institu- 
tion. The  proper  officer  of  the  company  was  to  pay  the  tax, 
and  deduct  it  from  the  dividends  of  stockholders  in  pro- 
portion to  the  amount  of  stock  held  by  each.  No  deduction 
was  to  be  made  in  case  of  stock  held  by  literary  or  charit- 
able institutions.  The  tax  might  be  commuted  into  an  in- 
come tax,  if  the  company  so  desired,  by  a  direct  payment 
into  the  county  treasury  of  ten  per  cent  of  all  dividends, 
profits  or  income,  in  lieu  of  any  tax  levied  upon  the  prop- 
erty. 

The  funds  received  from  the  corporation  tax  were  to 
be  distributed  through  the  state  treasury.  The  total  re- 
ceipts were  paid  over  to  the  state,  the  state  tax  was  then 
deducted,  and  the  remainder  was  credited  to  the  counties 
in  proportion  to  the  aggregate  amount  of  stock  held  or 
owned  by  stockholders  residing  in  them.  To  enable  the 
state  treasurer  to  make  the  proper  apportionment,  the 
proper  officer  of  every  corporation  liable  to  taxation  was 
required  to  furnish  annually  to  the  state  treasurer  a  list 
of  the  names  of  the  stockholders  in  the  company,  their 
places  of  residence,  and  the  amount  of  stock  held  by  them. 
The  state  treasurer  then  sent  to  each  county  a  list  of  its 
stockholders,  places  of  residence,  the  amount  of  stock 
held  by  each,  together  with  the  amount  of  tax  accredited 
to  the  county.  Provision  was  further  made  for  the  clistri- 

9  New  York  Statutes,  1823,  Chap.  262. 


DEVELOPMENT  OF  GENERAL  PROPERTY  TAX  5 

bution  of  the  money  to  the  several  cities  and  towns  in 
proportion  to  the  aggregate  amount  of  stock  held  therein. 
The  purpose  of  the  law,  it  stated,  was  to  achieve  the  re- 
sult that  would  have  been  reached  had  the  stockholders 
been  originally  assessed  on  their  holdings  at  the  place 
where  they  lived. 

This  first  statute  was  fought  in  the  courts  from  var- 
ious angles.  Some  of  the  decisions  narrowed  its  applica- 
tion, and  others  led  to  supplementary  legislation.  The 
question  whether  this  law  superseded  all  prior  statutes 
was  one  of  the  first  to  be  settled.  In  1817  a  law  had  been 
passed  to  encourage  manufacturing  in  the  state  which  ex- 
empted from  taxation  the  buildings,  machinery  and 
manufactured  products  in  the  hands  of  manufacturers 
of  cotton,  woolen  or  linen  goods.10  In  1827  the  property 
of  the  Columbia  Manufacturing  Company  was  sold  for 
taxes.  Action  was  brought  in  the  courts  on  the  basis  of 
the  law  of  181 7.  In  its  decision  the  court  held  that  the 
law  of  1823  was  a  revision  of  all  taxation  laws  and  super- 
seded all  previous  legislation.11 

This  decision  made  the  law  of  1823  the  basis  for  future 
legislation.  As  interpreted  by  the  court  it  was  to  be  ap- 
plied to  all  corporations  without  exception.  Evidently  it 
began  to  work  hardship  upon  roads  or  at  least  to  curtail 
their  extension,  for  in  1825  exceptions  were  made  in  some 
particular  cases.12  If  the  net  income  or  profits  of  turnpike, 
bridge,  canal  or  manufacturing  companies  did  not  exceed 
five  per  cent  on  their  capital  stock  they  might  commute 
their  property  taxes  by  paying  five  per  cent  of  all  profits 
or  income  directly  to  the  county  treasury.  The  legisla- 
ture in  1827-28  made  some  slight  changes,  the  most  im- 
portant being  a  provision  that  if  any  incorporated  com- 
pany could  show  to  the  satisfaction  of  the  board  of  sup- 
ervisors that  the  company  had  been  in  receipt  of  no  profit 
or  income,  it  should  be  stricken  from  the  assessment  roll, 
and  no  tax  imposed.13    Turnpike,  bridge,  and  canal  com- 

10  New  York  Statutes,  1817,  Chap.  64. 
MCowen,  556. 

"  New  York  Statutes,  1825,  Chap.  254. 

M  New  York  Statutes  1827,  Chap.  9,  and  revised  Chap.  13,  title  4, 
sects  11  and  12. 


6  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

parries  were  treated  more  leniently  than  before  in  that  if 
their  net  annual  income  did  not  exceed  five  per  cent  on 
capital*  stock,  they  were  exempt  from  taxation.  Marine 
insurance  companies  were  added  to  the  list  with  commu- 
tation privileges.  The  law  of  1823  had  made  no  attempt 
to  classify  corporations,  but  in  these  modifications  we 
have  a  distinct  recognition  of  the  principles  of  classifica- 
tion. In  other  respects  the  law  remained  unchanged  for 
a  number  of  years. 

The  commutation  provisions  in  the  above  laws  are  in- 
teresting in  the  light  of  present  income  taxation  discus- 
sion. They  might  easily  be  taken  to  indicate  that  the 
legislature  viewed  the  property  tax  as  a  tax  on  ability  to 
pay.  It  appears  that  it  was  viewed  as  a  sort  of  income 
tax,  and  where  it  obviously  failed  to  function  as  such  a 
tax,  it  was  modified.  We  shall  see  a  little  later,  however, 
that  the  courts  disclaimed  any  such  intention  on  the  part 
of  the  legislature. 

The  laws  had  not  yet  established  a  hard  and  fast  view 
of  the  legal  nature  of  a  corporation.  This  led  to  some 
interesting  developments  in  both  case  and  statute  law. 
The  bank  of  Ontario  had  been  chartered  in  181 5  and  was 
taxed  under  the  general  law  of  1813,14  until  the  law  of 
1823  was  enacted.  In  the  early  thirties  the  village  of 
Ontario  placed  an  assessment  against  the  bank.  It  enter- 
ed a  demurrer  on  the  ground  that  it  was  neither  an  in- 
habitant nor  freeholder,  and  only  such  could  be  assessed. 
The  Supreme  Court  held  that  the  term  "'inhabitant"  in- 
cluded corporation,  and  that  the  assessment  was  valid.15 
For  purposes  of  taxation,  then,  a  corporation  was  a  per- 
son and  an  inhabitant.  But  there  were  problems  still  un- 
solved. 

The  bank  of  Ithaca  had  been  notified  by  one  King,  the 
road  supervisor,  to  appear  at  eight  o'clock  on  a  certain 
morning  to  work  forty-nine  days  on  the  highways.  The 
bank  did  not  appear,  either  in  person  or  by  substitutes. 

14  New  York  Statutes,  1813,  Chap.  52.  This  stated,  as  in  previous 
laws,  that  shares  were  to  be  assessed  in  the  hands  of  the  stockhold- 
ers. 

15  Ontario  Bank  vs  Burnell,  10  Wendell,  186. 


DEVELOPMENT  OF  GENERAL  PROPERTY  TAX  7 

nor  did  it  proffer  a  commutation  payment.  A  justice 
fined  the  bank  forty-nine  dollars  whereupon  the  bank  car- 
ried the  case  to  the  Supreme  Court  which  decided  in  its 
favor.16  A  corporation,  the  court  held,  has  no  corporeal 
body;  it  has  no  material  existence;  it  is  incapable  of  per- 
forming labor  and  cannot  be  compelled  to  perform  an 
impossibility.  Hence  it  was  not  liable  to  assessment  to 
work  on  a  highway.  When  the  peformance  of  labor  is 
required,  then,  a  corporation  loses  its  personality.  But 
the  legislature  took  a  hand  in  the  matter  by  enacting,  in 
1837,  a  statute  which  was  very  likely  inspired  by  this  de- 
cision.17 It  provided  that  the  commissioner  of  highways, 
after  assessing  at  least  one  day's  work  on  each  male  in- 
habitant above  twenty-one  years  of  age,  " Shall  include 
among  the  inhabitants  of  each  such  town,  among  whom 
such  residue  is  to  be  apportioned,  all  moneyed  or  stock 
corporations  which  shall  appear  on  the  last  assessment, 
roll  of  their  town  to  have  been  assessed  therein."  The 
corporation  was  to  be  notified  of  the  amount  of  labor  as- 
sessed against  it  by  a  written  notice  to  its  officers,  and 
any  number  of  days'  work  not  exceeding  fifty  could  l;e 
required  in  any  one  day.  The  same  provision  was  made 
for  commutation  as  was  made  for  individuals.  Corpor- 
ations were  thus  re-established  as  persons,  even  for  work- 
ing on  the  highways. 

Other  questions  soon  came  before  the  courts.  What 
for  example,  was  the  precise  meaning  of  the  provision 
that  a  company  would  not  be  taxed  if  it  could  show  that 
it  had  received  no  profit  or  income  ?  Were  profit  and  in- 
come synonymous  terms,  or  did  the  law  intend  to  disting- 
uish between  them?  If  they  were  merely  two  terms  for 
one  thing,  then  net  income  must  have  been  intended. 
Some  companies  held  to  this  view,  and  refused  to 
pay  a  tax  because  they  had  no  clear  income.  Some 
assessors  ,on  the  other  hand,  took  it  that  gross  in- 
come was  meant.  These  difficulties  of  course  led  to  liti- 
gation. 

As  representatve  cases  we  shall  note  those  of  the  Com- 

"Bank  of  Ithaca  vs  King,  12  Wendell,  390. 
"New  York  Statutes,  1837,  Chap.  431. 


8  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ruercial  Insurance  Company,18  and  one  involving  two 
Niagara  banks  and  a  railroad  company.19  In  the  first 
case  the  company  asked  to  be  stricken  from  the  assess- 
ment roll  since  it  had  been  in  receipt  of  no  property  or  in- 
come, and  because  the  value  of  its  property  during  the 
year  had  not  equaled  the  stock  paid  in.  The  request  was 
refused,  and  a  tax  of  $1320  was  levied.  The  court  held 
that  the  tax  must  be  paid,  for  the  principle  had  never  been 
advanced  that  the  taxation  of  property  depended  upon 
whether  it  was  profitably  used  or  not.  No  such  distinc- 
tion was  made  in  taxing  the  property  of  individuals — in 
fact  to  make  it,  would  be  to  tax  the  skill  and  industry 
used  in  employing  capital  instead  of  taxing  capital  itself. 
The  court  quoted  a  letter  written  by  the  Comptroller  to 
the  assessor  in  1826  in  which  the  same  view  was  taken. 

The  point  at  issue  in  the  other  cases  was  similar.  One 
of  the  banks,  because  of  depreciation  of  state  stock  and 
other  causes,  had  suffered  a  loss  to  an  amount  exceeding 
its  whole  income  or  profits.  The  other  bank's  condition 
was  practically  the  same.  The  railroad  company  had 
devoted  all  receipts  to  necessary  expenses,  repairs,  and 
improvements,  so  it  had  no  profits  or  income  beyond  what 
had  been  thus  absorbed.  As  in  the  other  case  the  court 
decided  that  these  assessments  stand.  An  individual  was 
taxed  on  the  value  of  his  estate,  even  though  it  be  so 
managed  as  to  prove  a  charge  upon  him  instead  of  a  source 
of  profits.  Since  railroads  were  to  be  assessed  and  taxed, 
not  as  operating  units  but  as  separate  parcels  of  property 
in  the  different  towns  through  which  they  passed,  the 
court  held  that  this  part  of  the  law  did  not  apply  to  rail- 
roads which  would  be  subject  to  tax  even  though  no 
profits  or  income  had  been  received.  The  personal 
nature  of  corporations  was  emphasized,  and  the  general 
property  tax  was  rigorously  applied. 

In  the  case  of  banks  it  might  easily  have  happened  that 
the  original  capital  had  been  reduced  through  losses. 
Were  banks  in  such  cases  to  be  assessed  on  the  amount 
of  capital  paid  in,  or  secured  to  be  paid  in,  or  only  upon 

18  People  vs  Supervisors  of  New  York,  18  Wendell,  605. 

19  People  vs  Supervisors,  4  Hill,  20. 


DEVELOPMENT  OF  GENERAL  PROPERTY  TAX  9 

the  amount  left  after  losses  were  deducted?  Could  sur- 
plus and  individual  profits  be  assessed  and  taxed  as  prop- 
erty ?  Both  of  these  questions  came  before  the  courts  for 
settlement.  In  the  case  of  the  Farmers'  Loan  and  Trust 
Company20  losses  had  reduced  a  capital  of  $200,000  to 
$104,000.  The  bank  was  assessed  upon  the  original  amount 
and  refused  to  pay.  The  court,  after  a  lengthy  discus- 
sion, held  that  a  corporation  should  be  assessed  upon  the 
whole  nominal  amount  of  capital  paid  in,  or  secured  to  be 
paid  in,  and  that  no  deduction  was  to  be  made  for  losses 
of  capital,  or  for  debts.  It  further  held  that  no  deduction 
could  be  made  for  that  part  of  the  capital  which  might 
be  invested  in  the  stock  of  other  corporations  liable  to 
taxation.  This  was  afterward  recognized  by  the  legisla- 
ture to  be  double  taxation,  and  the  law  was  amended  ac- 
cordingly. The  Attorney  General,  in  1832,  had  held  that 
since  individuals  were  permitted  to  deduct  debts  from 
their  personal  property  assessments,  inter-corporate  hold- 
ings should  not  be  subject  to  double  taxation.21 

The  Bank  of  Utica  had  been  taxed  on  $70,000  surplus, 
which  was  described  on  the  assessment  roll  as  "other  per- 
sonal property  or  surplus."  The  court22  reversed  the  ac- 
tion of  the  assessors.  A  corporation  could  not  be  taxed 
on  surplus  profits  remaining  on  hand  and  undivided.  The 
capital  stock,  after  deducting  the  value  of  the  real  estate, 
was  the  basis  for  taxation.  Taxing  surplus  would  amount 
to  taxing  the  actual  rather  than  the  nominal  value  of  the 
stock,  and  this  the  legislature  did  not  intend.  This  de- 
cision, however,  was  not  a  final  settlement  of  the  matter. 
It  opened  the  way  for  evasions  of  various  sorts,  and  the 
problem  continued  to  occupy  the  attention  of  the  legisla- 
ture and  the  courts. 

We  have  seen  that  no  deductions  for  taxes  were  to  be 
made  from  dividends  on  stock  owned  by  the  state  ,or  a 
charitable  or  literary  institution.     It  appeared,  however, 

20  Farmers'  Loan  and  Trust  Company  vs  Mayor  of  City  of  New 
York.  7  Hill,  261. 

21  Report  of  Attorney  General,  Senate  Documents,  1832,  Vol.  2, 
No.  103. 

22  Bank  of  Utica  vs  City  of  Utica,  4  Paige,  399. 


10  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

that  this  provision  worked  to  the  advantage  of  the  cor- 
poration while  it  was  of  little  benefit  to  the  state  or  charit- 
able institution  which  might  own  its  stock.  A  statute  was 
accordingly  enacted  in  1845  which  required  the  corpora- 
tion to  add  to  the  dividend  paid  on  tax  exempt  stock,  a 
sum  equal  to  the  taxes  paid  on  the  same  amount  of  stock 
not  exempt  from  taxation.23  Thus  the  total  tax  burden 
upon  the  corporation  was  not  decreased,  but  part  went  to 
the  favored  stockholders. 

These  were  the  principal  ways  in  which  the  law  of  1823 
was  developed  and  modified  by  the  courts  and  the  legisla- 
ture. The  method  of  taxing  corporations  thus  established 
remained  until  1853.  Corporations  were  no  longer  look- 
ed upon,  as  in  the  law  of  181 3,  as  an  actual  group  of  nat- 
ural persons,  but  as  an  abstract,  immaterial  thing,  created 
by  law,  and  deriving  its  powers  from  the  law. 

The  growth  of  corporations  had  made  them  of  increas- 
ing importance  as  property-owning  factors,  and  hence  as 
objects  of  taxation.  The  expenditures  of  the  state,  howev- 
er were  rapidly  becoming  greater  than  the  revenues.24  In 
the  Comptroller's  report  of  1849  >tne  legislature  was  urg- 
ed to  observe  the  most  rigid  economy  in  making  appro- 
priations. Rather  than  burden  the  people  with  more  tax- 
es, he  wished  to  retrench  all  unnecessary  expenditures.25 
Expenditures,  however,  continued  to  grow  and  more  rev- 
enue had  to  be  secured.  One  way  to  obtain  the  needed 
funds  was  to  put  a  heavier  tax  burden  upon  corporations. 
This  is  at  least  a  partial  explanation  of  the  important 
statute  of  1853,  amending  the  general  tax  law.  The  de- 
sire to  introduce  a  larger  measure  of  system  and  uniform- 
ity into  the  corporation  tax  seems  to  have  been  another 
factor. 

In  the  first  place,  by  the  law  of  1853,26  tne  total  exemp- 
tion of  that  portion  of  capital  represented  by  surplus  or 

*  New  York  Statutes,  1845,  Chap.  195. 

24  The  tax  collected  from  corporations  in  1843  was  $381,372.89. 
Annual  report  of  State  Comptroller,  Assembly  Documents,  1844, 
Vol.  3,  No.  98. 

25  Annual  Report  New  York  State  Comptroller,  1839,  p.  4. 
241  New  York  Statutes,  1853,  Chap.  654. 


DEVELOPM ENT  OF  GENERAL  PROPERTY  TAX  1 1 

undivided  profits  was  done  away  with.  It  provided  that 
the  assessment  roll  should  contain  not  only  the  amount  of 
capital  stock  and  the  amount  invested  in  real  estate;  but 
also  the  amount  of  all  surplus  profits  or  reserve  funds  ex- 
ceeding ten  per  cent  of  the  amount  of  capital  stock  left 
after  deducting  for  real  estate  and  for  the  amount  of  stock- 
owned  by  the  state  or  charitable  institutions.  In  the  sec- 
ond place,  the  provision  for  the  commutation  of  the  prop- 
erty tax  into  an  income  tax,  which  had  already  been 
granted  to  turnpike,  bridge,  and  marine  insurance  com- 
panies, was  made  general.  If  any  corporation  had  not 
received  net  annual  profits  or  clear  income  equal  to  five 
per  cent  of  the  capital  stock,  after  deducting  the  assessed 
value  of  the  real  estate,  it  could  exempt  itself  from  the 
capital  stock  tax  by  paying,  directly  to  the  treasurer  of 
the  county  where  the  business  was  conducted,  five  per  cent 
of  such  net  profits  or  income  as  it  did  receive,  together 
with  the  taxes  levied  on  its  real  estate.  The  law  further 
stated  that  the  capital  stock  of  every  company  liable  to 
taxation,  except  as  exempted,  together  with  its  surplus 
profits  or  reserve  funds  exceeding  ten  per  cent  of  the 
capital  (less  the  real  estate  value)  together  with  the  real 
estate  should  be  assessed  and  taxed  in  the  same  manner 
as  the  personal  and  real  estate  in  the  county.  This  latter 
provision,  as  modified  in  1857,  remains  the  fundamental 
part  of  the  system  of  corporate  taxation  for  local  pur- 
poses. Corporations  are  taxed  locally  on  their  real  estate, 
and  upon  their  capital  stock  as  here  provided. 

This  law,  it  is  important  to  note,  introduced  a  uniform 
taxing  system  applying  to  all  corporations.  But  new  ex- 
emptions were  made  almost  at  once.  From  the  first, 
roads  and  turnpike  companies  had  been  especially  favored 
by  the  law  makers.  Because  of  competition  from  other 
routes  of  travel,  this  was  a  particularly  bad  period  for 
turnpike  companies,  and  in  1854  special  legislation  was 
enacted  in  their  behalf.27  Toll  houses,  fixtures,  and  all 
property  were  exempted  from  assessment  or  taxation  un- 
til the  net  annual  income  over  and  above  all  expenses  of 
repairs  and  collection  of  tolls  exceeded  five  per  cent  on 

27  New  York  Statutes,  1854,  Chap.  87. 


12  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

the  original  cost  of  the  road.  In  the  next  year28  the  net 
annual  income  allowed  before  taxes  could  be  imposed  was 
raised  to  seven  per  cent,  while  the  accumulation  of  a 
"suitable  reserve  fund"  was  allowed  as  part  of  the  ex- 
penses which  might  be  counted  against  income.  The 
loopholes  in  such  legislation  are  apparent,  and  it  is  not 
surprising  that  revenue  from  these  sources  was  small. 
Morever,  the  laws  did  not  provide  for  the  systematic  col- 
lection of  taxes,  or  for  any  definite  way  of  dealing  with 
companies  which  refused  to  pay  them.  Each  county 
handled  the  situation  in  its  own  way  and  much  revenue 
was  lost  to  the  state.  Many  corporations  went  into  in- 
solvency before  their  unpaid  taxes  had  been  collected. 
Successive  State  Comptrollers  asked  that  the  laws  be 
simplified,  that  more  explicit  directions  be  given  to  as- 
sessors, and  that  it  be  made  the  duty  of  county  treasur- 
ers immediately  to  prosecute  corporations  which  were  in 
arrears.29 

As  long  as  commutation  of  taxes  was  permitted  only 
to  highways  and  insurance  companies  there  was  little 
complaint,  but  as  soon  as  it  was  made  general  the  evils 
of  the  system  became  apparent.  This  matter  seems  to 
have  had  a  larger  importance  than  has  sometimes  been 
attached  to  it.30  State  Comptrollers  and  various  com- 
mittees condemned  the  commutation  provision  and  asked 
for  a  change.31  It  is  obvious  that  commutation  was  in- 
sistent with  the  principles  of  the  general  property  tax. 
The  purpose  was  to  tax  corporations  like  individuals,  but 
no  similar  privileges  were  granted  to  individuals.  There 
may  be  proper  reasons  for  putting  corporations  under  a 

28  New  York  Statutes,  1855,  Chap.  546. 

29  The  Comptroller's  report  for  1854  (Assembly  Documents,  1855, 
Vol.  1,  No.  4)  was  especially  urgent  along  these  lines.  The  reports 
for  several  succeeding  years  ask  for  the  same  relief. 

90  Professor  Seligman  (Essays  in  Taxation,  New  York,  1913,  p. 
147)  says  that  it  seems  few  corporations  ever  availed  themselves  of 
this  doubtful  privilege  of  commutation,  and  accordingly  in  1857 
the  law  was  changed. 

"The  report  of  the  Finance  Committee  (Senate  Documents,  1857, 
Vol.  2  No.  55)  and  the  Comptroller's  repot  (Assembly  Documents, 
1857,  Vol.  1.  No.  7.)  were  particularly  bitter  against  the  commuta- 
tion provisions. 


DEVELOPMENT  OF  GENERAL  PROPERTY  TAX  13 

special  rule  as  regards  taxation  yet  the  lack  of  profits  is 
hardly  a  sound  basis  of  discrimination  in  favor  of  this 
form  of  business  organization. 

Not  only  was  the  law  defective  in  principle,  but  it  gave 
opportunity  for  fraud.  Commutation  and  exemption 
were  secured  in  violation  of  the  intent  and  spirit  of  the 
law.  Affidavits  accompanying  application  for  exemp- 
tion were  artfully  worded  so  that  some  companies  which 
realized  an  income  of  more  than  five  per  cent,  perhaps 
double  this,  escaped  or  nearly  escaped  taxation.  Loss 
and  expense  were  words  which  were  juggled  with  to  cov- 
er up  actual  earnings.  Expense  often  included  money 
spent  for  fixtures,  property,  and  other  permanent  im- 
provements not  properly  chargable  to  annual  operating 
expenses.  A  heavier  tax  burden  was  thus  shifted  to  in- 
dividual tax  payers.  Such  were  the  conditions  painted 
by  those  who  recommended  a  revision  of  the  law.  The 
change  was  accomplished  in  1857.32  Besides  abolishing 
the  commutation  privilege  the  law  permitted  the  amount 
of  stock  owned  in  another  corporation  subject  to  the  tax 
to  be  deducted  from  the  amount  of  capital  stock  put  upon 
the  assessment  roll.  This  provision  attempted  to  eliminate 
the  double  taxation  formerly  inherent  in  the  operation 
of  the  law. 

But  this  law  as  revised  was  anything  but  definite,  and 
consequently  caused  much  litigation.  What  was  meant 
by  actual  value  of  the  stock  ?  When  was  there  a  surplus  ? 
Was  stock  invested  in  United  States  securities  exempt 
from  taxation?  Was  property  temporarily  outside  the 
state  subject  to  assessment?  These  and  many  other  ques- 
tions were  left  to  the  courts  for  interpretation. 

But  a  few  of  the  representative  cases  can  be  noted.  The 
Oswego  Starch  Factory  sought  to  decrease  its  taxes  by 
distributing  all  earnings  to  the  shareholders,  so  that  no 
profits  or  surplus  remained.  A  fifteen  per  cent  dividend 
had  been  declared,  consequently  the  stock  had  been  as- 
sessed at  seventy-five  per  cent  above  par.  The  company 
carried  the  matter  to  the  Supreme  Court,  and  then  to  the 
Court  of  Appeals.     The  Court  of  Appeals  affirmed  the 

,s  New  York  Statutes,  1857.  Chap.  456. 


14  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

action  of  the  lower  court  by  holding  that  for  the  purpose 
of  taxing  corporations  under  the  law  of  1857,  stock  was 
to  be  assessed  at  actual  value,  whether  above  or  below 
the  nominal  par  value,  and  this  irrespective  of  the  exist- 
ence of  surplus  capital  or  reserve.33 

Some  corporations  refused  to  pay  taxes  upon  that  part 
of  their  capital  stock  which  they  had  invested  in  United 
States  securities,  on  the  ground  that  the  constitution  for- 
bids the  taxation  of  the  federal  debt.  The  courts,  in  dif- 
ferent cases,34  took  the  opposite  view.  The  state  assess- 
ment was,  they  held,  not  in  form  merely,  but  in  fact  and 
principle,  upon  the  capital  stock  of  the  corporation  and 
not  upon  the  property  in  which  the  money  paid  in  for 
that  capital  was  invested.  There  could  be  no  objection 
to  the  state's  taxing  capital  invested  in  United  States  se- 
curities as  long  as  there  was  no  unfriendly  discrimina- 
tion against  the  United  States  as  a  borrower,  and  as  long 
as  the  property  in  stock  of  corporations  holding  United 
States  bonds  was  subjected  to  no  greater  burdens  than 
property  in  general. 

Steamship  companies  attempted  to  gain  exemption  on 
capital  invested  in  ships  which  either  were  being  con- 
structed or  were  registered  outside  the  state.  This  made 
it  necessary  for  the  courts  to  decide  what  effect  the  situs 
of  the  property  of  a  corporation  had  on  its  liability  to 
taxation.  In  two  cases,  one  decided  by  the  Supreme 
Court,35  and  the  other  by  the  Court  of  Appeals,36  the 
status  of  such  property  was  determined.  The  property  of 
a  corporation  need  not  be  physically  within  the  state  to  be 
taxable ;  if  legal  situs  and  ownership  be  so  situated  it  is 
taxable.  The  only  provision  for  taxing  corporations  was 
to  assess  the  capital  stock  at  actual  value  without  regard 
to  the  kind  or  situs  of  the  property  in  which  it  was  in- 
vested. 

83  Oswego  Starch  Factory  vs  Dolloway,  21  N.  Y.,  499. 

84  Bank  of  Commonwealth  vs  Commissioners  of  Taxes  and  As- 
sessments, 32  Barbour,  509  and  23  N.  Y.,  192  give  in  detail  the  at- 
titude of  the  courts  on  this  point.  For  cases  relating  to  it  in  the 
United  States  Supreme  Court  see  Chapter  VI.  p.  97. 

88  People  vs  Commissioner  of  Taxes,  3  Thompson  and  Cook,  678. 
88  Pacific  Mail  Steampship  Company  vs  Commissioner  of  Taxes, 
64  N.  Y.,  541. 


DEVELOPMENT  OF  GENERAL  PROPERTY  TAX  15 

Such,  then,  was  the  law  by  which  corporations  were  to 
be  taxed  for  the  next  several  years.  No  longer  were  cor- 
porations looked  upon  as  public  benefactors,  deserving 
special  encouragement  and  more  lenient  treatment  than 
natural  persons,  but  all  were  taxed  alike  under  practically 
the  same  rule.37  The  same  assessors  and  the  same  meth- 
ods of  assessment  served  for  the  man  with  the  small  farm 
worth  $1000  and  for  the  corporation  worth  $1,000,000. 
As  yet,  however,  neither  legislators  nor  judges  had  held 
that  the  corporate  form  gave  any  special  advantage  for 
which  remuneration  should  be  made,  nor  was  it  argued 
that  under  uniform  legislation  in  taxation  ,the  corpora- 
tions might  have  advantages  that  did  not  accrue  to  in- 
dividuals. 

This  system  of  "uniform  treatment"  was  not  however, 
entirely  satisfactory.  In  practically  every  successive  an- 
nual report  of  Comptrollers,  reform  measures  were  pro- 
posed to  the  legislature.  One  of  the  first  evils  to  be  em- 
phasized was  the  perennial  lack  of  uniformity  in  local  as- 
sessment methods — a  fault  which  was  brought  into  glar- 
ing relief  by  the  differences  in  the  assessment  of  similar 
corporations.  Local  assessors  had  to  appraise  the  real 
estate  and  the  "personalty"  of  even  the  largest  corpora- 
tions. True  values  were  easily  covered  up,  and  in  any 
case  the  assessor  rarely  was  competent  to  value  corporate 
property  correctly.  In  some  districts  the  corporations 
were  assessed  and  taxed  to  the  full  value  of  capital  and 
surplus,  while  in  others  the  assessment  was  as  low  as 
twenty-five  per  cent  of  the  actual  value.  This  evil  was 
an  inevitable  part  of  the  system. 

The  use  of  different  systems  of  equalizing  valuations 
led  to  further  injustice.  Not  only  did  special  districts 
take  advantage  of  the  law  for  their  own  good,  but  corpor- 
ations often  designated  as  the  place  of  the  principal  office, 
— where  the  assesments  were  to  be  made. — some  district 
where  the  corporation  was  unknown  to  the  assessor,  or 
where  the  actual  plant  was  so  far  away  that  the  assessor 
had  no  way  of  getting  at  real  values.     Such  were  the 

,T  Some  concessions,  however,  continued  to  be  made  to  banks  and 
insurance  companies. 


16  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

evils  which  the  Comptrollers  continued  to  emphasize  and 
for  which  they  asked  legislative  remedies. 

The  remedies  proposed  were  for  the  most  part  mere 
palliatives.  No  Comptroller  even  hinted  at  the  possibil- 
ity of  radical  change  in  the  law, — of  the  abandonment  of 
the  attempt  to  apply  the  general  property  tax  in  its  crude 
form  to  corporations.  It  was  urged  that  returns  should 
be  subjected  to  the  inspection  and  decision  of  one  person. 
This  would  insure  uniformity  in  the  mode  of  determin- 
ing valuations  as  well  as  more  reliable  data  than  could 
be  had  by  local  assessors  without  access  to  reliable  sourc- 
es of  information.  The  central  valuations,  it  was  pro- 
posed, could  be  sent  to  the  counties,  and  then  put  upon 
the  district  assessment  rolls.  The  listing  system  was  also 
proposed,  by  which  every  taxpayer  was  to  furnish  to  the 
assessor,  under  oath,  a  detailed  statement  of  all  his  prop- 
erty liable  to  taxation  together  with  its  value.  This  sys- 
tem was  used  in  several  of  the  western  states,  and,  it 
was  alleged,  with  success.  In  order  to  secure  uniform- 
ity in  the  assessment  of  real  estate,  it  was  considered  ad- 
visable to  have  state  assessors  visit  every  town  and  ward 
in  the  state,  and  ascertain  from  personal  observation  and 
investigation,  the  true  and  actual  value  of  all  real  estate. 
These  valuations  were  to  be  turned  over  to  a  state  board 
of  equalization,  and  their  returns  distributed  to  the  coun- 
ties by  the  comptroller.  This  would  insure  that  a  large 
amount  of  real  estate  which  had  escaped  taxation  would 
be  placed  upon  the  rolls,  and  would  also  give  a  more 
equal  valuation  than  would  the  old  haphazard  way. 

It  was  not  until  1870  that  the  legislature  took  any  ac- 
tion. Provision  was  made,  in  that  year,  for  a  special  tax 
commission,  to  report  in  1871.  An  exhaustive  review  of 
the  system  of  taxation  was  given  by  the  commission,  its 
evils  were  pointed  out,  and  remedies  were  suggested.38  It 
emphasized  the  tax  dodging  resulting  from  the  exemp- 

MThe  report  of  this  commission  is  given  in  Assembly  Docu- 
ments, 1871,  Vol.  3,  No.  39.  The  commissioners  were  David  A. 
Wells,  Edwin  Dodge  and  George  W.  Cuyler.  This  report  has  be- 
come famous,  and  is  by  far  the  best  treatment  of  the  New  York 
tax  system  that  we  have.  A  second  report  was  made  in  1872  (Sen- 
ate Documents,  1872,  Vol.  2,  No.  26.) 


DEVELOPMENT  OF  GENERAL  PROPERTY  TAX  1  7 

tion  of  federal  securities,  and  even  went  so  far  as  to  say 
that  from  the  standpoint  of  taxable  resources  it  was  a 
fortunate  matter  that  so  many  of  these  secureties  hal  fal- 
len into  the  hands  of  foreigners.  United  States  bonds 
were  often  used  as  collateral  upon  which  to  borrow  mon- 
ey. One  who  had  $100,000  in  bonds  might  borrow  $100,- 
000  and  invest  it  in  business.  When  assessed,  the  return 
would  be  $100,000  business  capital,  $100,000  just  debts 
and  liabilities,  no  personal  property  subject  to  taxation. 
For  example,  the  fire  insurance  companies  of  New  York 
City,  with  a  capital  of  about  $24,000,000,  and  an  estimat- 
ed surplus  of  $11,000,000,  making  a  total  of  $35,000,000, 
were  assessed  in  1870  on  a  personal  property  valuation  of 
$9,240,965  and  a  real  estate  valuation  of  $3,000,000. 

The  suggestion  made  aimed  largely  at  a  more  uniform  ap- 
plication of  the  general  property  tax  to  the  corporate  form 
of  industry.  The  commission  advocated,however,  a  special 
tax  upon  corporations  which  enjoyed  monoply  priveleges, 
and  cited  several  instances  of  such  conditions.  In  spite  of 
the  thoroughness  of  the  work  and  the  vividness  with 
which  evils  were  portrayed,  the  recommendations  failed 
to  bring  about  any  reform.  Reasons  for  this,  which  no 
doubt  may  be  considered  largely  true,  were  given  by  the 
New  York  Times.  It  said  editorilly:  "The  commission 
appointed  in  1870  was  barren  of  practical  results,  partly, 
we  suspect,  because  the  changes  suggested  involved  some- 
thing like  thoroughness  in  the  work.  Local  opinion  was 
not  ripe  for  them  and  local  politicians  were  unwilling  to 
undertake  the  task  of  educating  their  constituants  up  to 
the  mark  at  which  comprehensive  legislation  might  be 
possible.''39 

It  was  not  until  1876  that  the  legislature  was  again 
moved  to  the  point  of  taking  further  action.  In  that  year 
the  Assembly  adopted  a  resolution40  to  the  effect  that  a 
commission  be  appointed  to  prepare  a  bill  relating  to  as- 
sessment and  taxes  to  be  presented  to  the  next  legislature. 
The  resolution  suggested  certain  reform  measures  to  be 
incorporated  in  the  bill.     One  of  these  was  that  corpora- 

"New  York  Times,  April  15,  1879. 
"Assembly  Documents,  1876,  Vol.  6,  No.  105. 


18  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

tions  and  joint  stock  companies  should  be  assessed  and 
taxed  by  state  assessors.  The  assessment  should  be  based 
upon  a  percentage  of  gross  receipts,  upon  the  value  of 
snares  in  proportion  to  dividends,  or  in  any  other  manner 
that  seemed  just  and  equitable.  The  rate  was  to  be  grad- 
uated according  to  investments  in  real  estate  while  no  de- 
duction was  to  be  made  for  such  investments.  It  was 
further  suggested  that  manufacuring  companies  be  as- 
sessed at  a  low  figure,  that  real  estate  continue  to  be  as- 
sessed where  located,  and  that  all  corporation  taxes  ex- 
cept on  real  estate  be  paid  directly  to  the  state 
treasury.  Here  were  suggestions  for  real  reform, 
and  at  least  a  hint  of  the  possibility  of  using  some  method 
other  than  the  general  property  tax.  But  nothing  result- 
ed from  the  resolution,  and  the  Comptrollers  continued  to 
inveigh  against  the  then  existing  methods  of  taxation. 
The  reports  of  Comptrollers  from  1875  to  J88o  are  prac- 
tically unanimous  in  their  condemnation  of  the  evils 
which  existed.  Because  of  the  high  rate  of  taxation  in 
some  places,  the  employment  of  capital  had  become  un- 
remunerative.  A  continuance  of  such  a  policy  spelled 
ruin.  As  a  whole,  however,  the  personal  property  of  cor- 
porations was  very  much  underassessed.  The  assessment 
of  real  estate,  it  was  pointed  out,  might  approximate  its 
real  value,  because  it  forced  itself  upon  the  notice  of  the 
assessors,  but  personal  property  could  escape  because  it 
was  so  easily  concealed  or  moved.  To  prove  the  conten- 
tion, figures  were  cited  to  show  that  the  assessed  value  of 
personal  property  had  actually  declined  from  year  to 
year.41 

In  their  report  for  187642  the  State  Assessors  asserted 
that  the  assessment  of  the  stock  of  incorporated  compan- 
ies, as  generally  practiced,  was  no  more  than  a  mockery. 
The  working  of  the  law,  in  their  opinion,  had  reached 
a  point  from  which  a  new  departure  was  dispensable.  In 
their  report  for  187843  they  expressed  a  surprise  and  in- 

41  Annual  Report  of  New  York  State  Comptroller,  1879. 

"Annual   Report  of   New  York  State  Assessors,   Senate   Docu- 
ments, 1879,  Vol.  2,  No.  28. 

a  Annual  Report  of  New  York  State  Assessors,  State  Documents, 
1879.  Vol.  2.  No.  28. 


DEVELOPMENT  OF  GENERAL  PROPERTY  TAX  19 

dignation  that  legislators  into  whose  hands  great  trusts 
had  been  committed,  and  who  were  supposed  to  guard 
the  welfare  of  the  people,  could  longer  refuse  to  grapple 
with  the  tax  laws  and  either  amend  them  so  as  to  make 
them  uniform  in  their  purposes  and  operation,  or  change 
the  system  so  as  to  confer  the  greatest  good  upon  the 
greatest  number.  They  even  advocated  the  collection  of 
all  state  taxes  (except  what  would  be  necessary  for  the 
state  capitol  then  in  construction  and  in  which  the  people 
would  want  to  have  a  share)  from  domestic  and  foreign 
corporations  doing  business  in  the  state.  This  latter  sug- 
gestion is  closely  akin  to  the  present  much  discussed  re- 
form of  separation  of  state  and  local  revenues.  But  it 
seemed  impossible  to  impress  the  urgent  importance  of 
tax  reform  upon  the  minds  of  the  legislators. 

In  1879  the  legislature  seems  to  have  been  somewhat 
aroused  from  its  lethargic  attitude  but  no  positive  accom- 
plishment was  reached.  As  expressed  editorially  in  the 
New  York  Times,  the  legislature  merely  "showed  a  dis- 
position to  do  something."44  Beginning  with  1879  tne 
newspapers  of  the  state  began  to  give  more  attention  to 
taxation  matters.  The  Times  showed  how  corporations 
were  evading  taxation  by  investing  capital  in  nontaxable 
secureties,  by  locating  the  principal  office  in  districts  of 
low  taxation,  and  by  other  devices.45  It  was  claimed  that 
for  years  the  influence  of  railroads  and  other  corporations 
had  been  powerful  enough  to  defeat  all  efforts  to  compel 
them  to  bear  their  just  proportion  of  public  burdens.  The 
legislature,  throughout  the  session,  was  criticized  because 
of  inactivity,  and  because  of  its  apparent  unwillingness 
to  do  anything  with  the  tax  situation.  Just  before  ad- 
journment the  Times  said  editorially  :46  "The  point  has 
been  reached  at  which  shadowy  indications  of  a  willing- 
ness to  correct  the  flagrant  evils  of  the  present  system  of 
taxation  and  to  substitute  for  it  a  system  at  once  equitable 
and  productive,  will  no  longer  suffice.  Year  after  year 
the  evils  have  been  heard  off,  the  demands  now  is  for 

44  New  York  Times,  April  21,  1879. 
48  New  York  Times,  January  16,  1879. 
"New  York  Times,  April,  21,  1879. 


20  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

effective  remedies.  It  is  admitted  that  these  cannot  be 
hoped  for  this  year  and  it  is  all  but  certain  that  for  the 
clumsy  expedients  now  before  the  legislature  there  is  no 
chance.  All  that  members  who  honestly  desire  reform 
recognize  at  the  moment  possible  is  some  indecisive  ac- 
tion or  some  general  expression  of  opinion  that  shall  seem 
to  strengthen  the  likelihood  of  obtaining  legislation  next 
year."  This  well  expressed  the  situation: — an  aroused 
public  demanding  reform,  the  hostile  attitude  of  state 
officials  to  the  existing  system,  and  the  partial  awakening 
of  the  legislature  to  the  need  of  reform. 

Under  these  circumstances,  the  legislature  could  not 
well  resist  much  longer.  Among  the  first  things  it  did 
in  1880  was  to  attack  the  tax  situation.  A  joint  com- 
mittee was  chosen  to  revise  the  tax  law.  Through  the 
efforts  of  this  committee  ,the  pressure  brought  to  bear  by 
the  public,  and  through  the  interest  of  certain  individual 
law  makers,  a  new  tax  law  was  finally  passed.  This  law 
is  the  basis  of  the  present  general  system  of  taxing  cor- 
porations for  state  purposes. 


CHAPTER   II. 

THE   ANNUAL    FRANCHISE   TAX    UPON   CORPORATIONS 

The  present  annual  franchise  tax  upon  corporations 
is  based  on  the  statute  enacted  June  30,  1880,1  It  intro- 
duced the  indirect  system  of  taxation  for  state  purposes 
which  has  since  been  largely  followed.  No  change,  how- 
ever, was  made  in  the  method  of  taxation  for  local  pur- 
poses. 

Under  this  law  every  corporation  was  required  to  re 
port  annually  to  the  State  Comptroller,  the  amount  of  cap- 
ital stock  paid  in,  and  rate  per  cent  of  every  dividend  de- 
clared during  the  preceding  year.  If  there  should  be  no 
dividend,  or  should  the  dividend  be  less  than  six  per 
cent,  on  the  par  value  of  the  stock,  the  company  was  to 
furnish  an  estimate  of  the  actual  value  of  the  capital 
stock.  This  value  must  not  be  less  than  the  average  price 
at  which  the  shares  had  sold  during  the  preceding  year. 
If  the  comptroller  was  dissatisfied  with  the  report  he  was 
empowered  to  make  a  revaluation.  Penalties  for  neglect 
to  make  reports  where  provided  while  two  successive  fail- 
ures furnished  ground  for  proceeding  to  forfeit  the  cor- 
poration charter.2 

The  law  further  noted  the  exceptions  and  formulated 
the  rule  by  which  taxes  were  to  be  computed.  Banks, 
savings  banks,  life  insurance  companies,  foreign  compan- 
ies, and  manufacturing  companies  did  not  come  under  the 
provisions  of  the  act.  The  tax  was  to  be  computed  as 
follows :  If  the  dividends  amounted  to  six  per  cent  or 
more  upon  the  par  value  of  the  stock,  the  tax  was  to  be 
one-fourth  of  a  mill  for  each  per  cent  of  dividend  so  made 

1  New  York  Statutes,  1880,  Chap.  542. 

2  The  penalty  for  failure  to  furnish  the  required  report  was  an 
addition  of  ten  per  cent  to  the  tax  levied  on  the  corporation  for  each 
year  the  report  was  not  furnished. 

21 


22  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

or  declared.  If  there  were  no  dividends,  or  if  they  were 
less  than  six  per  cent,  then  the  tax  was  to  be  one  and  one- 
half  mills  per  dollar  on  the  valuation  of  the  stock  as  pro- 
vided for  above.  Should  a  part  of  the  stock  pay  more 
than  six  per  cent,  as  preferred,  this  was  to  be  taxed  at  the 
one-fourth  mill  rate,  while  the  rest,  if  its  dividends  were 
less  than  six  per  cent,  was  to  be  taxed  at  the  other  valua- 
tion. 

The  taxes  collected  under  this  law  were  to  be  used  for 
the  ordinary  expenses  of  the  state.  In  1881.  3  to  meet 
constitutional  difficulties,  the  new  tax  was  defined  as  a 
tax  upon  the  corporate  franchise  or  business  of  such  or- 
ganizations as  came  under  the  law.  In  18824  the  powers 
of  the  Comptroller  were  extended.  If  he  were  dissatis- 
fied with  the  report  of  a  company  only  a  part  of  whose 
capital  was  employed  in  the  state,  he  could  determine  the 
amount  of  capital  which  should  be  taken  as  the  basis  of 
the  tax.  If  the  corporation  were  dissatisfied  it  could  ap- 
peal to  a  board  composed  of  the  Secretary  of  State,  the 
State  Treasurer  and  the  Attorney  General,  the  decision 
of  which  was  to  be  final.  Broader  powers  were  also  given 
to  the  Comptroller  in  dealing  with  corporations  which 
were  delinquent  in  making  reports.5 

This  was  the  first  tax  reform  dealing  with  corporations 
in  a  quarter  of  a  century,  and  a  period,  too,  marked  by 
the  expansion  and  development  of  large  scale  business, 
and  the  corporate  form  of  organization.6  Yet  the  re- 
forms met  with  much  criticism.  The  press,  of  which  the 
the  New  York  Times  will  again  be  taken  as  representa- 
tive, was  anything  but  favorable.  It  characterized  the 
whole  result  of  the  arduous  and  well-meant  labors  of  the 

8  New  York  Statutes,  1881,  Chap.  151. 

4  New  York  Statutes,  1882,  Chap.  151. 

5  The  Comptroller  was  given  power  to  examine  the  books  and 
records  of  the  company  and  to  fix  the  amount  of  the  tax.  If  the 
company  failed  to  pay  the  tax  and  expense  of  examination  within 
thirty  days  they  could  be  sued.  Witnesses  and  officers  might  be 
subpoenaed  and  examined  under  oath.  Should  they  fail  to  appear 
they  were  guilty  of  contempt. 

6  The  provisions  for  taxing  the  corporations  exempted  from  the 
action  of  this  law  will  be  given  in  the  chapters  dealing  with  such 
organizations. 


THE  ANNUAL  FRANCHISE  TAX  UPON  CORPORATIONS  23 

joint  committee  as  "an  incongruous  patch  work",  and  said 
that  the  tax  laws  remained  as  much  as  ever  in  need  of 
systematic  and  judicious  revision.7  It  prophesied  that 
the  "short-sighted  bungling  of  the  last  legislature"  would 
give  the  courts  more  to  do  than  the  tax  collectors.8  The 
difficulty  most  emphasized  was  adjusting  the  annual  fran- 
chise assessment  to  the  assessment  which  had  just  been 
completed.  This  difficulty,  of  course,  could  be,  at  most, 
only  temporary.  Even  the  Governor  had  some  misgiv- 
ings for  he  is  quoted  as  having  said. in  a  memorandum 
tiled  with  his  approval  of  the  act  that  "for  want  of  per- 
fect and  comprehensive  provisions  it  [the  act]  may  fail 
to  accomplish  all  that  it  was  evidently  intended  to  do."!) 
He  did  not  deem  the  objections  of  sufficient  importance  to 
warrant  the  withholding  of  his  approval  from  the  law, 
but  the  defects,  he  thought,  should  be  remedied  by  the 
next  legislature. 

Much  difficulty  was  experienced  in  attempting  to  ap- 
ply the  new  law.  The  experiment,  however,  though  im- 
perfectly tried,  had  demonstrated  the  possibility  of  re- 
lieving the  burden  put  upon  real  estate  by  the  use  of  such 
a  tax  for  state  purposes.  What  was  now  needed  was  to 
make  the  law  more  serviceable.  Suggestions  to  accom- 
plish this  were  made  to  the  legislature  in  1881,  but  it  could 
be  induced  to  make  no  changes  in  the  tax  reform  of  the 
previous  year. 

The  attitude  of  the  Comptroller  and  State  Assessors 
to  the  law  was  on  the  whole  favorable,  although  they 
did  not  consider  it  free  from  objections.  In  the  first 
Comptroller's  report  following  the  passage  of  the  act,  it 
was  shown  that  the  new  law  followed,  in  part,  the  Penn- 
sylvania system,  but  that,  as  always  must  be  the  case  when 
only  a  part  of  a  complete  system  is  adopted,  the  result 
could  not  be  entirely  satisfactory.10     The  report  further 

T  New  York  Times,  Editorial,  May  29,  1880. 

*New  York  Times,  Editorial,  July  15,  1880. 

9  New  York  Times,  Editorial,  July  31,  1880. 

"Annual  Report  of  New  York  State  Comptroller,  Assembly 
Documents,  1881,  Vol.  1,  No.  3.  The  Comptroller  had  been  one  of  the 
Commission  appointed  to  investigate  the  Pennsylvania  system  and 
had  worked  energetically  to  have  it  adopted  by  the  legislature. 


24  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

showed  that  the  Pennsylvania  system  was  practically  a 
separation  of  state  and  local  revenues.  This  method  was 
not  well  understood  by  the  legislature,  neither  did  they 
give  it  careful  study,  and  it  was  defeated  because  of  the 
radical  character  of  the  innovations  it  would  have  intro- 
duced. While  he  considered  the  attempt  of  the  legisla- 
ture an  improvement,  yet  the  Comptroller  asked  that  a 
committee  be  appointed  to  work  out  a  system  more  like 
that  of  Pennsylvania.  Such,  he  thought,  would  not  only 
work  admirably  in  New  York,  but  would  simplify  the 
problems  of  corporation  taxation. 

The  report  of  the  State  Assessors  was  somewhat  more 
optimistic,  although  they  too  saw  serious  difficulties  in  the 
way  of  the  operaton  of  the  new  law.  It  was,  they  thought, 
a  step  in  the  right  direction,  and  with  the  proper  amend- 
ments would  amount  to  a  very  substantial  improvement. 
If  the  personal  property  of  corporations  as  well  as  of  in- 
dividuals could  be  made  to  bear  a  fair  and  equitable  share 
of  the  public  burdens,  the  taxation  problem  would  be  in 
large  measure  settled.  They  attributed  the  corporate  in- 
fluence to  prevent  tax  legislation  to  the  fact  that  existing 
inequalities  would  be  perpetuated.  Had  the  law  been 
drawn  so  that  the  method  of  assessment  would  have  been 
uniform  and  equitable,  no  just  ground  for  complaint 
would  have  existed.11 

In  all  this  comment  on  the  part  of  officials  and  of  the 
press,  the  principle  set  forth  in  the  law  of  1823 — that  cor- 
porations are  persons  and  should  be  taxed  as  such —  was 
given  most  importance.  The  difficulties  that  had  arisen 
were  bound  up  with  the  problem  of  valuing  the  property 
of  the  larger  interests  so  as  to  secure  just  and  equal 
treatment.  But  in  the  report  of  the  State  Assessors  for 
1 88 1  we  see  the  dawning  of  some  new  and  exceedingly 
important  ideas  in  respect  to  the  general  principles  of  cor- 
porate taxation.  The  assessors  begin  to  suspect  that  per- 
haps something  more  than  absolute  equality  in  assessment 
and  taxation  is  required  if  exact  justice  is  to  be  done. 
After  the  personal  property  and  real  estate  of  a  corpora - 

11  Annual  Report  of  New  York  State  Assessors,  Senate  Documents, 
1831,  Vol.  1,  No.  40. 


THE  ANNUAL  FRANCHISE  TAX  UPON  CORPORATIONS  25 

tion  is  fairly  taxed  with  similar  possessions  of  individuals, 
there  is  yet  in  the  corporate  hands  a  peculiar  species  of 
property, — the  corporate  franchise.  This  is  a  privilege, 
they  contended,  granted  by  the  community  as  a  whole 
to  the  corporation,  and  varies  in  its  character  and  in  its 
value;  They  pointed  out  three  sources  of  franchise  val- 
ues :  ( i )  the  partial  exemption  of  the  owners  of  the  cor- 
poration from  ordinary  business  risks  by  limitation  of 
liability;  (2)  the  facility  with  which  equities  in  corporate 
property  may  be  transferred;  (3)  the  value  arising,  in 
the  case  of  some  corporations,  from  their  possessions  and 
use  of  public  property.  These  values  had  long  escaped 
taxation  and  the  new  law  was  but  a  step  in  the  right 
direction.  They  contended  that  franchise  values  should 
he  justly  and  equitably  assessed,  and  that  such  public 
grants  might  justly  bear  a  high  rate  of  taxation.  The  only 
limit  to  such  taxation  would  be  in  a  rate  which  would 
substantially  check  corporate  enterprise  or  drive  it  from 
the  state.  Nothing  in  the  present  methods  of  taxation 
had  produced  such  an  effect,  since  the  use  of  the  cor- 
porate form  of  organization  had  steadily  grown  even  in 
states  where  the  tax  was  heavier  than  in  New  York. 

The  assessors  granted  the  law  to  be  an  improvement 
over  former  methods  yet  suggested  changes  which  would 
secure  more  revenue  and  greater  equity.  The  act  was 
criticized  because  it  made  no  provision  for  taxing  the 
valuable  privilege  conferred  in  permittting  a  corporation 
to  be  formed,  and  an  organization  tax  was  suggested  as 
a  remedy.  As  a  payment  for  this  privilege  a  tax  was 
proposed  of  one  mill  per  dollar  on  the  capital  stock  of 
every  new  corporation  (with  a  minimum  tax  of  $100). 
It  was  estimated  that  this  would  yield  $50,000  a  year, 
while  it  would  be  collected  more  cheaply  and  paid  more 
cheerfully  than  any  other  tax.  It  was  also  contended 
that  more  substantial  justice  should  be  secured  in  classify- 
ing the  franchise  values,  especially  among  public  service 
corporations. 

In  spite  of  the  defects  the  assessors  were  pleased  with 
what  the  law  had  accomplished  since  it  had  been  in  force. 
They  said :     "Under  the  operation  of  these  laws  over 


26  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

Si, 000,000  have  already  been  saved  to  the  other  tax 
payers  of  the  state.  The  prospect  is  pleasing"  for  more 
equal  and  less  taxation.  The  last  two  years  witnessed 
a  great  advance  toward  a  just  and  exact  system  of  taxa- 
tion. The  burden  on  the  shoulders  of  toil  has  been  light- 
ened while  at  the  same  time  capital  has  not  been  denied 
its  rightful  returns  or  enterprize  deprived  of  its  legiti- 
mate reward.  The  state  tax  has  been  greatly  reduced  and 
this  too  without  hinderance  or  delay  to  the  great  works 
of  public  consequence  that  have  given  and  continue  to 
give  New  York  State  the  lead  in  the  procession  of 
states.12 

After  the  law  really  got  into  operation  it  seems  to  have 
been  more  favorably  looked  upon  than  when  it  first  came 
from  the  hands  of  the  makers.  The  lowest  general  tax 
rate  since  1856  was  in  1882,  and  this  was  attributed  to 
the  working  of  the  new  franchise  tax  on  corporations.13 
It  was  thought  that  this  low  rate  could  be  maintained  and 
that,  with  a  few  amendments  to  the  law,  in  a  few  years 
the  entire  expenses  of  the  state  government  could  be  se- 
cured without  levying  any  state  tax  upon  the  counties.14 

The  new  law,  gave  rise  of  course,  to  a  number  of  dis- 
putes which  the  courts  had  to  decide.  The  general  result 
of  this  litigation  was  to  more  firmly  establish  the  law. 
We  shall  note  but  a  few  decisions.  The  most  important 
case  was  that  of  The  People  vs  The  Home  Insurance  Com- 
pany of  Nezv  York.1*  The  insurance  company  contested 
the  constutionality  of  the  law  on  two  grounds.  First, 
because  in  a  tax  law  the  object  of  the  tax  must  be  definite- 
ly stated ;  it  must  be  either  a  defined  expenditure,  a  defin- 
ed class  of  expenditures,  or  a  defined  fund  for  future 
expenditures.  The  law,  by  making  the  tax  for  "the  ordin- 
nary  and  current  expenses  of  the  state,"  did  not  provide 
for  a  definite  object,  and  it  was  claimed  that  it  was  there- 

"  Annual  Report  of  New  York  State  Assessors,  Senate  Docu- 
ments, 1882,  Vol.  5,  No.  58. 

"  Annual  Report  of  New  York  State  Comptroller,  Assembly 
Documents,  1882,  Vol.  1,  No.  3. 

"Annual  Report  of  New  York  State  Comptroller,  Assembly 
Documents,  1882,  Vol.  1.  No.  3. 

18  92  N.  Y.,  328. 


THE  ANNUAL  FRANCHISE  TAX  UPON  CORPORATIONS  27 

fore  unconstitutional.  The  second  ground  for  object- 
ion was  that  the  tax  impeded  and  burdened  the  action  of 
the  United  States  government  and  was  for  this  reason 
invalid.  Less  important  objections  were  that  a  general 
tax  on  property  of  which  United  States  bonds  were  a 
part  was  in  effect  a  tax  on  the  bonds  and  therefore  invalid, 
and  that  the  constitutional  requirements  of  equality  of 
burden  was  violated. 

The  Court  of  Appeals  upheld  the  law  at  every  point. 
As  to  the  alleged  abuse  of  a  specified  purpose,  the  court 
said  that  "the  system  by  which  finances  of  the  state  are 
classified  and  the  purposes  to  which  their  money  may  be 
applied  are  embodied  in  numerous  acts  of  the  legislature 
creating  various  and  distinct  separate  funds.  Among 
these  is  a  so-called  general  fund  recognized  by  the  con- 
stitution." Each  of  these  funds,  aside  from  the  general 
fund,  had  some  special  object,  and  payments  could  not  be 
made  from  it  for  any  other  purpose.  Most  of  the  current 
expenses  were  paid  from  this  general  fund  and  it  was 
provided  by  the  constitution  that  any  appropriations  made 
by  the  legislature  not  specifically  charged  to  designated 
funds  were  to  be  paid  out  of  it.  A  specification,  therefore, 
the  court  held,  for  the  replenishment  of  this  fund  was  a 
sufficiently  definite  statement  of  the  object  of  the  tax. 
To  have  held  otherwise  would  have  been  in  conflict  with 
precedent,  for  a  law  passed  in  1855  levying  a  tax  for  the 
general  fund  was  held  to  have  a  sufficiently  definite  pur- 
pose to  meet  the  constitutional  requirements.16 

The  question  whether  it  was  constitutional  to  tax  cap- 
ital stock  invested  in  United  States  bonds  was  also 
answered  affirmatively.  The  point  upon  which  the  decis- 
ion hinged  was  whether  the  assessment  was  upon  the 
franchise,  or  whether  it  was  upon  the  property  of  the 
corporation.  The  court  held  that  the  assessment  was  up- 
on the  franchise  and  cited  precedent  where  it  had  been 
held  lawful  for  legislative  power  to  prescribe  a  rule  of 
value.17  It  could  not  be  denied  that  a  fair  measure  of 
the  value  of  franchises  of  corporations  would  be  the  prof - 

"People  ex  rel.  Burrows  vs  Supervisors,  17  N.  Y.,  235. 

"  Monroe  Savings  Bank  vs  City  of  New  York,  37  N.  Y.,  365. 


28  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

its  resulting  from  their  use,  and  it  could  not  be  maintain- 
ed that  such  a  rule  was  unequal  in  its  effect  upon  different 
corporations  or  unjust  in  general  operations.  The  tax 
was  to  be  a  franchise  tax  and  not  a  property  tax ;  it  was 
levied  upon  corporations  alone,  and  one  of  the  penalties 
for  non-payment  was  forfeiture  of  character.  The  tax 
was  levied  upon  business  prosperity  as  evidenced  by  the 
power  to  declare  dividends  and  not  upon  the  value  of  the 
corporate  property.  Income  was  used  merely  as  a  meas- 
ure of  ability  to  pay. 

This  case  was  finally  carried  to  the  United  States  Su- 
preme Court  which  held,  as  did  the  state  court,  that  the 
authorities  were  not  required  to  deduct  the  amount  of 
stock  which  the  company  held  in  United  States  bonds  and 
compute  taxes  only  upon  dividends  derived  from  the  re- 
mainder.18 Double  taxation  was  not  upheld  as  a  valid 
complaint  against  the  law.  It  was  decided  that  the  legis- 
lature may,  at  its  discretion,  impose  unequal  or  double 
taxes,  and  in  determining  a  question  of  legislative  power 
the  courts  were  precluded  from  interfering.19 

Most  of  the  cases  which  arose  were  in  regard  to  the 
application  of  the  law  in  particular  cases  rather  than  at- 
tacks upon  its  constutionality.  So  far  as  broad  questions 
of  principle  were  concerned,  subsequent  decision  followed 
the  findings  in  the  Home  Insurance  Company  case.  Some 
particular  assessments  made  under  the  law,  however,  were 
declared  illegal.  The  case  of  the  Albany  and  Greenbush 
Bridge  Company  is  interesting  because  of  the  suggestion 
made  for  determining  the  value  of  real  estate  for  taxation 
purposes.     The  board  of  assessors  had  made  the  assess- 

1S  People  vs  Home  Insurance  Company,  199  U.  S.,  129. 

19  Some  corporations,  after  paying  the  state  tax  sought  to  be  freed 
from  local  taxes.  In  the  cases  of  Westchester  Fire  Insurance  Com- 
pany vs  Davenport  (25  Hun,  630)  and  Eastern  Transportation  Line 
vs  Commissioner  of  Taxes  (26  Hun,  446)  the  court  held  that  the 
taxes  under  the  law  were  for  the  exclusive  benefit  of  the  state,  and 
the  act  did  not  interfere  witli  the  power  of  local  authorities  to  im- 
pose further  taxes  for  municipal  or  county  purposes.  In  the  case 
of  Western  Fire  Insurance  Company  vs  Davenport  (91  N.  Y.,  574) 
the  courts  hold  that  the  exemptions  granted  under  the  law  were 
only  exemptions  for  the  state  taxes  and  did  not  affect  the  right  to 
tax  for  local  purposes. 


THE  ANNUAL  FRANCHISE  TAX  UPON  CORPORATIONS  29 

rnent  at  $280,000.00  and  the  company  made  application 
to  have  it  reduced  to  $110,000.00.  The  assessors  refus- 
ed to  comply  and  the  case  was  carried  to  the  Supreme 
Court  which  decided  the  reduction  should  be  made.  In 
determining  the  value  of  real  estate  for  taxation,  it  held, 
the  cost  of  acquiring  such  property  may  be  considered, 
yet  a  more  controlling  consideration  is  the  earning  capac- 
ity.20 

Even  though  the  new  tax  law  was  upheld  in  its  entirety 
by  the  courts21  and  the  assessments  made  under  it  gene- 
ally  sustained,  yet  the  system  was  not  deemed  perfect. 
It  is  obvious  that  injustice  resulted  as  long  as  the  entire 
capital  of  a  foreign  corporation  doing  business  in  the 
state  was  subject  to  the  tax.  An  act  was  passed,  however, 
in  1885  stipulating  that  the  basis  of  taxation  of  foreign 
corporations  under  the  law  was  to  be  the  amount  of  capi- 
tal stock  employed  within  the  state.22  Information  on 
this  point  was  required  in  the  report  made  by  foreign 
corporations,  and  the  Comptroller  was  given  power  to 
investigate  and  modify  the  stated  amount.  Few  corpo- 
rations made  protracted  objections  to  the  law  yet  criti- 
cisms arose  because  of  the  exemptions,  evasions  and  large 
amount  of  litigation.  In  1885  the  Comptroller,  aided  by 
the  Attorney  General,  submitted  a  bill  to  the  legislature 
the  passage  of  which  he  though  would  minimize  the  diffi- 
culties.23 

One  of  the  objections  to  the  existing  tax  system  was 
that  the  burden  was  unequally  distributed  between  real 
estate  and  personal  property.  In  a  lengthy  special  report 
to  the  legislature  in  1866  the  Comptroller  condemned  the 
unjust  burden  upon  real  estate.24     He  dwelt  particularly 

20  Albany  and  Greenbush  Bridge  Company  vs  Assessors,  34  Hun, 
321. 

21  In  a  letter  to  the  Comptroller,  December  18,  1883  (Annual  Re- 
port to  State  Comptroller,  1883,  p.  110)  the  Attorney  General  said 
that,  in  all  of  its  essential  features,  the  corporation  law  had  been 
sustained  by  the  highest  court  in  the  state  in  a  manner  very  satis- 
factory to  the  officers  who  had  its  execution  immediately  in  charge 
— the  Comptroller  and  Attorney  General. 

22  New  York  Statutes,  1885  Chap.  501. 

23  Senate  Documents,  1885,  Vol.  6,  No.  49. 

*  Special  Report  New  York  State  Comptroller,  Assembly  Docu- 
ments, 1886,  Vol.  8,  No.  89. 


30  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

upon  the  rate  of  taxation,  and  attributed  the  inequality  to 
fallacious  assumptions  under  which  corporations  were 
taxed.  The  assumption  was,  he  claimed,  that  corporate 
property  was  purchased  solely  by  issues  of  stock  and  con- 
versely that  capital  stock  represented  the  entire  value  of 
corporate  possessions.  He  continued  to  show  that  the 
capital  stock  represented  by  bonded  indebtedness  practi- 
cally escaped  taxation.  This  idea,  however,  does  not  con- 
form to  his  justification  for  deducting  the  value  of  real 
estate  from  the  value  of  capital  stock  in  computing  the 
annual  franchise  tax.  This  should  be  done  to  avoid 
double  taxation  since  a  part  of  the  capital  stock  was  in- 
vested in  real  estate.  His  idea,  it  seems,  was  that  the  tax 
attempted  to  reach  the  otherwise  untaxed  personal  equi- 
ties in  the  corporation.  Real  estate  was  taxed  directly 
and  the  bond  holders  were  (in  theory)  taxed  on  their 
bonds.  Only  shares  of  stock  were  not  taxed  directly.  Had 
bond  issues  been  considered  as  capital  stock,  as  sug- 
gested, the  property  would  have  been  doubly  taxed.  A 
system  of  taxing  corporations  on  bonds  based  upon  the 
amount  of  interest  paid  was  suggested  and,  according 
to  the  Comptroller's  interpretation  of  the  law,  very  prop- 
erly rejected. 

We  find  the  question  of  taxing  indebtedness  frequently 
discussed  in  governors'  messages  and  state  officials'  re- 
ports. A  special  tax  on  bonds  collected  by  the  Comp- 
troller ;  a  tax  on  the  sales  of  securities ;  the  assessments 
of  corporations  on  the  basis  of  net  or  gross  earnings; 
the  adoption  of  some  uniform  rule  of  valuation  to  be  used 
by  local  assessors  regardless  of  ownership ;  these  schemes 
all  had  their  advocates.  The  Comptroller,  in  his  report 
for  1887,  advocated  a  more  effective  tax  upon  indebted- 
ness, and  presented  the  draft  of  a  bill  to  tax  such  securi- 
ties one-fourth  of  a  mill  for  every  one  per  cent  interest 
paid.25 

All  these  protests  and  recommendations  accomplished 

"Annual  Report  of  New  York  State  Comptroller,  Assembly 
Documents,  1887,  Vol.  1,  No.  3.  This  proposal  was  quite  similar 
to  present  proposals  for  a  millage  tax.  New  York  is  now  attempting 
to  handle  the  taxing  of  some  securities  through  the  secured  debts 
law  (New  York  Statutes,  1911,  Chap.  802). 


THE  ANNUAL  FRANCHISE  TAX  UPON  CORPORATIONS  31 

no  results  at  the  time.  The  only  legislation  of  importance 
was  a  new  organization  tax  adopted  in  1886.26  There- 
after every  corporation,  joint  stock  company,  or  associa- 
tion incorporated  by  or  under  any  general  or  special  law 
of  the  state,  having  capital  stock  divided  into  shares,  was 
to  pay  for  state  purposes  a  tax  of  one-eighth  of  one  per 
cent  upon  the  amount  of  its  authorized  capital  stock.  A 
like  tax  was  to  be  paid  upon  future  increases  in  capital- 
ization, and  no  corporate  powers  could  be  granted  or  exer- 
cised until  the  tax  was  paid.  Corporations  not  for  profit 
were  exempt  from  the  tax. 

The  law  was  welcomed  as  a  proper  compensation  for 
the  valuable  privilege  of  exercising  corporate  powers. 
The  New  York  Times  Said:  "The  bill  imposing  a  tax  of 
one-eighth  of  one  per  cent  upon  capital  stock  of  corpora- 
tions hereafter  formed,  as  compensation  to  the  state  for 
the  privilege  of  incorporation,  provides  for  but  a  moder- 
ate charge  for  the  granting  of  corporate  franchises.  Ag- 
gregated capital  enjoys  many  advantages  under  our  laws 
and  the  direct  return  it  makes  is  inadequate.  The  tax 
would  be  no  check  upon  legitimate  enterprise  and  would 
bear  a  small  proportion  to  the  advantage  derived  from 
the  privilege  of  aggregating  capital  by  incorporation  for 
profitable  purposes."  27 

It  was  feared  by  some  that  the  tax  would  check  the 
organization  of  corporations  in  the  state  which  might 
offset  any  advantages  to  be  gained.  The  Comptroller,  in 
his  report  for  1886,  did  not  find  such  fears  justified.  He 
reported  that,  from  the  passage  of  the  law  on  April  16 
to  September  30,  $53,600.06  had  been  collected,  and  that 
there  had  been  no  tendency  to  drive  organizations  from 
the  state.  He  considered  the  law  wise  and  just,  and 
added  if  there  were  such  enterprises  that  could  not  afford 
to  bear  the  burden,  the  state  could  well  afford  to  lose 
them.28  As  interpreted  by  the  court  an  organization  tax 
must  be  paid  in  case  of  the  consolidation  of  two  corpora- 

16  New  York  Statutes,  1886,  Chap.  143. 
27  New  York  Times,  Editorial,  March  10,  1886. 
"Annual  Report  of  New    York    State    Comptroller,    Assembly 
Documents,  1887,  Vol.  1,  No.  3. 


32  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

tions  even  though  each  had  already  paid  such  a  tax.29 
Likewise  a  new  corporaion  formed  under  the  reor- 
ganization act  must  pay  the  organization  tax.30  In  1901 
the  organization  tax  was  reduced  to  one-twentieth  of  one 
per  cent,  to  be  in  no  case,  however,  less  than  one  dollar.31 
By  the  law  of  190632  if  a  company  decreased  capital 
and  subsequently  increased  it,  the  tax  must  be  paid  only 
upon  the  excess  of  new  capital  over  what  bore  the  first 
tax.  In  consolidation  any  excess  of  capital  over  the  com- 
bined capital  previously  taxed  must  bear  the  organization 
tax.  Another  statute  enacted  in  1889  gave  the  Comp- 
troller power  to  adjust  the  claims  of  any  company  for 
taxes  illegally  paid,  and  provided  that  such  adjustment 
might  be  reviewed  by  the  Supreme  Court.33  This  was 
necessary  because  of  a  number  of  court  decisions  which 
had  declared  that  some  taxes  had  been  illegally  assessed. 

The  slight  modifications  just  noted  did  not  satisfy  those 
interested  in  thoroughgoing  tax  reform.  The  receipts 
from  corporation  taxes  were  falling  off.  This  was  due 
partly  to  court  decisions  narrowing  the  scope  of  the  law, 
and  partly  because  in  preceding  years  items  for  enormous 
taxes  were  allowed  to  be  credited  to  future  taxes.  The 
extension  of  exceptions ;  rebates  because  of  illegal  assess- 
ments ;  the  statute  providing  that  only  the  portion  of  the 
capital  employed  in  the  state  was  subject  to  tax ;  and  the 
rebates  and  decline  in  revenue  occasioned  by  the  decision 
of  the  Supreme  Court  making  it  illegal  to  tax  interstate 
commerce  were  factors  in  causing  the  revenue  to  fall 
off,34  while  it  was  believed  that  corporations  were  leav- 
ing the  state.35 

20  New  York  Phonograph  Company  vs  Rice,  57  Hun,  486. 

30  People  vs  Cork,  110  N.  Y.,  443.  This  was  changed  by  law  in 
1806.     See  text. 

"New  York  Statutes,  1901,  Chap.  448.  This  was  changed  to  five 
dollars  in  1910  (Chap.  472.) 

82  New  York  Statutes,  1906,  Chap.  524. 

83  New  York  Statutes,  1889,  Chap.  463. 

34  See  Annual  Report  New  York  State  Comptroller,  1889,  p.  2S. 
For  the  last  previous  fiscal  year  the  organization  tax  had  fallen  off 
almost  $20,000. 

35  In  testimony  before  the  special  commission  in  1893,  (Assembly 
Documents,  1893,  Vol.  13,  No.  69)  Mr.  T.  L.  Feitner,  a  commission- 


THE  ANNUAL  FRANCHISE  TAX  UPON  CORPORATIONS  33 

The  annual  franchise  tax  was  often  partially  evaded 
because  dividends  were  made  the  basis  for  computing  the 
tax.  It  was  reported  that  many  companies  were  earning 
profits  of  from  five  to  fifty  per  cent,  sometimes  more,  up- 
on their  capital,  but  distributed  only  a  part  in  dividends, 
turning  the  rest  into  surplus.  In  such  cases  the  state 
received  nothing  from  the  amount  of  earnings  passed  to 
the  surplus  fund.  It  would  have  been  more  equitable,  of 
course,  to  have  based  the  tax  on  the  amount  earned, 
whether  distributed  or  not,  rather  than  upon  dividends 
declared.  Comptrollers  generally  wished  to  relieve  real 
estate  from  the  burden  of  state  taxation,  and  pointed  to- 
the  disproportionate  burden  thrown  upon  this  class  of 
property  by  the  evasion  which  corporations  were  practic- 
ing. 

The  courts,  meanwhile,  were  frequently  called  upon  to 
interpret  the  law  of  1880,  as  amended.  The  term  "incor- 
porated or  organized  under  any  law  of  this  state"  was  to 
include  any  combination  of  individuals  which  claimed 
privileges  not  enjoyed  by  individuals  or  copartnerships.36 
The  term  "doing  business  in  this  state"  had  reference  only 
to  foreign  corporations.  The  tax  was  not  upon  property, 
but  upon  franchise;  and  domestic  corporations  were  not 
exempt  from  taxation  upon  the  amount  of  business  done 
outside  the  state.37  There  was  no  limit  to  the  time  in 
which  a  corporation  might  apply  to  the  Comptroller  for 
revision  of  a  tax  levied  against  it,  nor  could  the  Compt- 
roller refund  any  taxes  illegally  collected.  Such  refunds 
could  only  be  made  through  legislative  appropriation.38 

er  of  taxes  in  New  York  City,  expressed  the  opinion  that  it  was 
not  alone  the  special  taxes  upon  corporations  which  led  them  to 
incorporate  in  other  states.  He  thought  the  reports  required  caused 
more  publicity  than  they  desired.  He  considered  the  system  a  good 
one  because  it  caused  the  home  companies  to  be  looked  upon  as 
creditable  while  those  going  out  of  the  state  were  considered  more 
or  less  fraudulent. 

"People  vs  Wemple,  117  N.  Y.,  136. 

*T  American  Contracting  and  Dredging  Company  vs  Wemple,  129 
N.  Y.,  558. 

wIn  re  Duffy,  133  N.  Y.,  152. 


34  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

This  difficulty  was  soon  eliminated  by  legislative  enact- 
ment.39 

The  tax  law  of  1881  was  materially  amended  in  189640 
and  again  in  1906.41  The  fundamental  principle  of  an 
annual  franchise  tax  on  capital  stock  was  retained,  but 
attempts  were  made  to  formulate  more  distinct  classifica- 
tions. The  law  of  1881,  as  here  amended,  gives  the  sys- 
tem by  which  the  annual  franchise  tax  is  assessed  upon 
the  capital  stock  of  corporations. 

Corporations  subject  to  the  annual  franchise  tax  are 
required  to  make  yearly  reports  to  the  comptroller  stat- 
ing the  amount  of  authorized  capital  stock,  the  amount  of 
stock  paid  in,  the  date  and  rate  of  each  dividend  declared, 
the  entire  amount  of  capital  and  the  amount  of  capital 
employed  in  the  state.  The  tax  is  to  be  paid  in  advance, 
and  is  based  upon  the  amount  of  capital  stock  employed 
within  the  state  during  the  preceding  year.  The  capital 
stock  employed  in  the  state  is  the  same  proportion  of  the 
entire  capital  stock  as  assets  within  the  state  bear  to  the 
entire  assets. 

The  classificaion  of  capital  stock  for  the  purpose  of  as- 
sessing the  annual  franchise  tax  is  as  follows :  ( 1 )  If  divi- 
dends have  amounted  to  six  or  more  per  cent  upon  the 
par  value  of  the  stock,  the  tax  rate  is  one-fourth  of  a  mill 
for  each  per  cent  of  dividends  made  or  declared.  (2)  If 
dividends  have  been  less  than  six  per  cent  and  (a)  assets 
do  not  exceed  liabilities,  exclusive  of  capital  stock,  or  (b) 
the  average  selling  price  of  the  stock  during  the  year  has 
been  below  par,  or  (c)  if  no  dividend  was  declared,  then 
the  rate  of  tax  is  three  fourths  of  a  mill.  (3)  If  dividends 
have  been  less  than  six  per  cent  and  (a)  assets  exceed 
liabilities,  exclusive  of  capital  stock,  by  an  amount  equal 
to  or  greater  than  the  par  value  of  the  stock  or  (b)  if  the 
average  selling  price  of  the  stock  has  been  above  par,  the 
tax  rate  is  one  and  one-half  mills,  but  the  valuation  of  the 
stock  shall  not  be  less  than  (a)  par  value;  (b)  difference 

"New  York  Statutes,  1889,  Chap.  463  gives  the  Comptroller 
power  to  make  refunds. 

40  New  York  Statutes,  1896,  Chap.  908. 

41  New  York  Statutes,  1906,  Chap.  474. 


THE  ANNUAL  FRANCHISE  TAX  UPON  CORPORATIONS  35 

between  assets  and  liabilities,  exclusive  of  capital  stock; 
(c)  average  selling  price  of  the  stock  during  the  year. 
(4)  If  a  part  of  the  capital  stock  has  paid  more  than  six 
per  cent  dividend  while  a  part  has  paid  no  dividend  or 
less,  the  above  rules  are  to  be  applied  to  each  portion  of 
the  stock  as  if  it  existed  alone.  (5)  Corporations  not 
assessable  by  the  above  rules  are  to  be  taxed  by  an  amount 
not  less  than  would  be  produced  by  an  assessment  of  (a) 
one  and  one-half  mills  on  the  actual  value  of  the  capital 
stock,  or  (b)  one  and  one-half  mills  on  the  average  sell- 
ing price  during  the  year. 

A  number  of  corporations,  however,  are  exempt  from 
the  annual  franchise  tax  on  capital  stock.  These  are 
banks,  savings  banks,  insurance  companies,  trust  com- 
panies, manufacturing  and  laundering  companies,  (to  the 
extent  of  capital  actually  employed  in  the  state  in  manu- 
facturing and  selling  products  of  such  manufacturing,) 
mining  companies  wholly  engaged  in  mining  within  the 
state,  agricultural  and  horitcultural  associations.  Com- 
panies owning  or  operating  elevated  railroads  or  surface 
roads  not  operated  by  steam,  and  companies  formed  for 
supplying  water  or  gas,  for  electric  or  steam  heating, 
lighting  or  power  purposes  are  also  exempt  from  the  tax. 
To  secure  exemption,  laundering,  manufacturing,  and 
mining  companies  must  have  at  least  forty  per  cent  of 
their  capital  stock  invested  in  property  within  the  state, 
and  used  for  laundering,  manufacturing,  or  mining  pur- 
poses.42 

From  the  tone  of  these  provisions  we  may  infer  that 
there  has  been  a  change  in  the  general  attitude  towards 
corporations.  While  once  they  had  been  favored  and  en- 
couraged by  special  exemptions,  and  lax  administrative 
laws,  they  were  now  viewed  as  the  owners  of  special  priv- 
ileges, properly  liable  to  taxation.  Some  small  tendency 
appears,  too,  to  depart  from  the  principle  of  the  general 
property  tax,  although  it  remains  in  large  measure  the 
basis  of  the  system.     In  general,  it  is  clear  that,  in  these 

42  The  provisions  for  taxing  corporations  exempt  from  the  annual 
franchise  tax  on  capital  stock  are  discussed  in  the  chapters  dealing 
with  such  corporations. 


36  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

laws,  corporations  were  to  be  dealt  with  more  stringently 
than  individuals. 

The  law,  as  given  above,  left  many  points  for  judicial 
interpretation.  The  question  as  to  what  "capital  stock" 
means,  and  how  it  shall  be  used  in  applying  the  law  has 
often  arisen.  The  answers  of  the  courts  have  not  always 
been  consistent.  The  Court  of  Appeals  defined  it  as  mean- 
ing not  the  share  stock  held  by  individuals,  but  the  actual 
capital  which  this  represented.43  As  the  basis  for  the 
franchise  tax  it  was  the  equivalent  of  the  term  "capital", 
and  was  the  amount  of  capital  so  employed  upon  which 
the  tax  was  to  be  computed.  It  further  held  that  bonds, 
whether  United  States  bonds  or  not,  in  the  absence  of 
proof  that  they  were  bought  with  a  corporation's  surplus, 
should  be  treated  as  capital  employed  in  the  state,  and 
as  a  part  of  the  basis  upon  which  the  franchise  tax  should 
be  computed.  Holdings  in  other  corporations  were  to  be 
treated  in  like  manner. 

Where  no  dividends  were  paid  or  where  they  were  less 
than  six  per  cent,  the  actual  and  not  the  par  value  of  the 
capital  stock  employed  within  the  state  was  held  to  be 
the  proper  basis  for  computing  the  franchise  tax.  Where 
there  had  been  no  dividends  or  sales  of  stock,  the  value 
was  to  be  determined  by  taking  the  value  of  the  assets 
after  deducting  liabilities  and  adding  to  the  sum  then  re- 
maining the  value  of  the  good  will  of  the  business,  in- 
cluding its  right  to  conduct  business  under  a  franchise.44 
The  tax  was  to  be  based  upon  capital  activity  employed 
in  its  corporate  business,  and  not  upon  the  passive  hold- 
ing of  it  in  unproductive  land.  A  corporation  whose  entire 
capital  stock  was  issued  in  payment  for  an  island  consist- 
ing of  unimproved  swamp  land  was  not  taxable  on  its 
capital  stock.45     In  case  no  dividend  has  been  declared, 

48  Commercial  Cable  Company  vs  Morgan,  178  N.  Y.,  433. 

"People  vs  Roberts,  154  N.  Y.,  101. 

45  Niagara  River  Hydraulic  Company  vs  Roberts,  30  Supreme 
Court,  Appellate  Division,  180.  The  Court  of  Appeals  later  held 
(198  N.  Y.,  250)  that  the  law  did  not  mean  that  capital  stock  should 
be  employed  in  business  to  render  it  taxable.  If  the  stock  was  rep- 
resented by  real  estate  it  must  be  deemed  to  have  been  "employed" 
within  the  meaning  of  that  expression  of  the  law. 


THE  ANNUAL  FRANCHISE  TAX  UPON  CORPORATIONS  37 

the  Comptroller  may  estimate  the  value  of  the  capital 
stock  at  the  average  price  for  which  the  stock  has  sold 
during  the  year  although  such  price  may  exceed  the  par 
value  of  the  stock  and  thus  indirectly  tax  the  surplus.46 
The  average  amount  of  capital  employed  during  the  year, 
and  not  the  amount  in  use  at  any  one  time  must  be  taken 
as  the  basis  for  the  tax.47 

The  state  had  the  power  to  impose  a  franchise  tax, 
even  if  substantially  all  the  property  appraised  was  ex- 
empt by  United  States  statute.48  The  imposition  of  the 
franchise  tax  computed  upon  dividends  was  not  a  tax  up- 
on property,  and  did  not  violate  the  restriction  of  the  fed- 
eral constitution  prohibiting  states  from  interfering  with 
imports  from  other  states  or  foreign  countries.49  The 
part  of  the  capital  stock  of  a  New  York  corporation  rep- 
resented by  merchandise  temporarily  in  the  hands  of  sell- 
ing agents  outside  the  state,  which  is  not  sold  but  is 
brought  back  into  the  state,  is  taxable.50 

The  increase  of  exemptions  from  the  annual  franchise 
tax  led  to  the  testing  of  the  constitutionality  of  the  law 
in  respect  to  the  principle  of  uniformity.  The  Court  of 
Appeals  held  that  by  merely  exacting  a  payment  for  the 
privilege  of  exercising  corporate  powers,  the  state  did 
not  impose  a  property  tax.  The  legislature,  it  held,  is 
not  bound  to  impose  the  same  conditions  upon  all  corpor- 
ations for  the  privilege  of  doing  business  in  New  York. 

It  may  grant  or  withhold  the  privilege  in  the  case  of 
each  corporation  as  it  sees  fit,  and  the  rules  relating  to  the 
taxation  of  property  do  not  apply.51 

These  laws  constitute  the  method  for  assessing  the  an- 
nual franchise  tax.  The  basis  for  the  tax  is  capital  stock 
while  the  rate  is  determined  by  a  number  of  variable  fac- 
tors— dividends,  market  price  of  stock,  and  financial  con- 

48  Colonial  Trust  Company  vs  Morgan,  162  N.  Y.,  654. 

47  Brooklyn  Rapid  Transit  Company  vs  Morgan,  57  Supreme 
Court,  Appellate  Division,  335. 

48  U.  S.  A.  P.  P.  Company  vs  Knight,  174  N.  Y.,  475. 
"Matheson  vs  Roberts,  158  N.  Y.,  162. 

50  Farmers'  Loan  and  Trust  Company  vs  Wells,  180  N.  Y.,  16 
61  Vanderwort  Company  vs  Glynn,  194  N.  Y.,  387. 


38  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

dition  of  the  corporation.  The  payment  of  this  tax  re- 
lieves the  capital  stock  from  any  other  tax  for  state  pur- 
poses. It  is,  however,  assessed  locally  for  local  purposes. 
It  seems  an  attempt  has  been  made  to  consider  the  profit- 
ableness of  a  company  in  determining  the  tax  since  classi- 
fications are  based  upon  dividends.  Some  of  the  diffi- 
culties which  have  arisen  under  the  law  of  1880,  as 
amended,  we  shall  consider  the  next  chapter. 


CHAPTER    III. 

PROBLEMS  AND  DIFFICULTIES  OF  GENERAL  TAX  ON 
CORPORATIONS 

Since  1880  corporations,  except  those  exempt  by 
law,  have  borne  the  annual  franchise  tax  upon  their  capi- 
tal stock.  This  method  is  an  improvement  over  the  one 
previously  used  and  has  not  been  void  of  good  results.  The 
direct  system  of  raising  taxes  for  state  purposes  has  been 
superseded,  to  a  great  extent,  by  the  indirect  system.  In 
earlier  years  the  direct  tax  was  easily  levied,  was  simple, 
and  largely  satisfactory  in  operation.  The  few  towns 
and  small  amount  of  personal  property  went  hand  in  hand 
with  a  government  of  trivial  expenses.  As  industrial  or- 
ganization became  more  complex  the  tax  laws  failed  to 
properly  classify  property  and  property  owners,  and  in- 
justice resulted.  Personal  property  evaded  assessment 
while  real  property  bore  a  disproportionate  burden  of  the 
tax.  The  amount  of  personal  property  increased  rapidly 
yet  the  amount  found  on  the  assessment  rolls  actually  de- 
creased from  year  to  year.  Not  only  was  little  personalty 
reached,  but  the  valuation  of  realty  in  the  different  dis- 
tricts was  so  haphazard,  either  by  accident  or  design,  that 
it  became  necessary  to  establish  equalizing  tribunals. 
Equalizing,  under  the  circumstances,  could  not  be  ade- 
quate and  much  injustice  remained. 

The  annual  franchise  tax  attempts  to  remedy  the  evils 
which  had  grown  up.  Personal  property,  undoubtedly, 
is  made  to  bear  more  of  its  legitimate  burden  while  the 
lack  of  uniformity  through  local  assessments  has  been 
eliminated.  The  evasion  which  arose  under  the  require- 
ment that  personal  property  be  assessed  at  the  place  of  the 
principal  office  has  likewise  been  stopped. 

From  the  standpoint  of  revenue  and  expense  of  collec- 

39 


40  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

tion  the  tax  is  in  a  large  measure  satisfactory.  While 
not  as  much  is  received  from  this  source  as  in  some  other 
states,  it  forms  an  important  part  of  the  income  of  the 
state.1  From  1900  to  1902  there  was  an  increase  of  200 
per  cent  in  the  number  of  corporations  taxed  which  of 
course  greatly  increased  the  revenue.2  The  expense  of 
collection  and  administration  has  been  less  than  one  per 
cent.,  and  the  number  of  corporations  paying  the  tax  in 
1903  was  more  than  7500.  There  are  now  more  than 
40,000  corporations  paying  the  tax. 

Many  difficulties  and  problems,  however,  still  present 
themselves.  One  which  has  always  existed  and  which 
still  proves  troublesome  is  in  the  determination  of  the 
value  of  capital  stock.  The  Attorney  General,  in  his  re- 
port for  189s,3  quotes  the  language  of  the  court  in  the 
Union  Trust  Company  vs  Coleman,  (126  N.  Y.,  443), 
that  "capital  stock  is  not  the  share  stock  but  the  company's 
capital  and  surplus  which  should  be  assessed  at  its  actual 
value  when  that  is  known  or  can  be  ascertained."  A  dis- 
tinction was  drawn  between  the  capital  stock  of  a  com- 
pany and  that  of  the  shareholder.  That  of  a  company, 
it  held,  is  simply  its  property  existing  in  money  or  prop- 
erty or  both,  while  that  of  the  shareholder  is  representa- 
tive, not  merely  of  the  existing  and  tangible  capital,  but 
also  of  surplus,  dividend  earning  power,  franchise,  and 
goodwill  of  an  established  business.  The  capital  stock  of 
a  company  is. owned  and  held  by  the  company  in  its  cor- 
porate character;  that  of  the  shareholders  is  owned  and 
held  by  them  in  different  proportions  as  individuals.  The 
one  belongs  to  the  corporation,  the  other  to  the  corpora- 
tors. The  actual  value  of  the  capital  may  be  widely  dif- 
ferent from  the  share  value  although  the  par  value  always 
corresponds  to  it.     The  law  intended  to  deal  with  the  com- 

^he  income  from  this  source  is  between  three  and  four  million 
dollars.  It  is  almost  one-third  of  the  amount  received  from  all 
forms  of  corporation  taxes. 

'This  increase  can  largely  be  attributed  to  the  legislation  in  1901, 
affecting  the  status  of  foreign  corporations. 

'Report  of  the  Attorney  General,  1898,  Senate  Documents,  Vol. 
1.  No.  9. 


PROBLEMS  AND  DIFFICULTIES,  GENERAL  TAX  ON  CORPORATIONS  41 

pany's  capital,  not  with  the  share  stock  which  it  does  not 
own. 

If  this  opinion  were  to  be  strictly  followed  the  share 
stock  would  have  nothing  to  do  with  the  subject  of  valua- 
tion. Only  the  capital  and  surplus  of  the  corporation,  as- 
sessed at  its  own  value  without  regard  to  the  selling  value 
of  its  shares,  could  be  considered.  The  distinction  which 
the  court  draws  is,  of  course,  sound,  but  the  value  of  the 
one  thing  is  often  reflected  in  the  value  of  the  other.  If 
a  company  has  a  large  amount  of  surplus  from  which 
dividends  are  being  paid,  the  share  stock  will  be  more 
valuable.  On  the  other  hand,  the  value  of  a  company's 
capital  is  not  always  shown  by  the  share  value.  If  a  com- 
pany put  its  earnings  into  betterment  it  may  cause  a  small 
dividend  which  in  turn  will  be  reflected  in  a  low  selling 
value  of  the  share.  Where  the  value  of  the  capital  stock 
is  difficult  to  ascertain  the  value  of  the  share  might  well 
be  considered  as  one  of  the  determining  factors. 

The  courts  have  not  consistently  held  to  this  opinion 
but  have  deviated  so  frequently  that  it  would  be  impos- 
sible to  follow  their  rulings  in  assessing  the  capital  stock. 
They  have  proposed  one  method  where  the  dividend  de- 
clared is  above  six  per  cent,  another  where  it  is  below, 
and  still  a  third  for  foreign  corporations.  There  can  be 
no  good  reason  for  different  methods  of  valuation  in  these 
cases.  Should  it  be  considered  desirable,  as  the  court 
procedure  would  indicate,  that  different  classes  of  cor- 
porations should  not  be  taxed  uniformly,  the  result  should 
be  secured  through  the  rate  of  tax  and  not  through  differ- 
ent methods  of  valuation. 

The  legislative  exemption  of  secured  bonds4  from  taxa- 
tion gives  corporations  a  chance  to  evade  all  or  part  of 
the  annual  franchise  tax.  Often  stock  is  issued  as  a  bonus 
and  the  only  real  value  received  into  the  treasury  is  from 
the  sale  of  bonds.    Such  corporations  exercise  exactly  the 

*The  secured  debts  tax  law  was  passed  in  1911  (Chap.  802).  By 
its  provision  any  bond  secured  by  mortgage  on  real  property,  by  a 
deed  of  trust  or  real  or  personal  property,  or  by  the  deposit  of  se- 
curities as  collateral  is  exempt  from  payment  of  taxes  after  a  tax 
of  one-half  of  one  per  cent  has  been  paid  and  stamps  have  been 
affixed  indicating  the  payment. 


42  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

same  franchise  privileges  as  if  their  stock  had  been  issued 
for  actual  property.  When  the  bonded  indebtedness  is 
considered  a  liability  and  deducted  from  assets  in  determ- 
ining the  amount  of  capital  stock,  often  there  is  little  left 
upon  which  to  levy  a  tax.  The  franchise  of  such  com- 
panies are  just  as  valuable  as  if  all  the  assets  were  rep- 
resented by  shares  of  stock,  yet  the  existence  of  bonds 
makes  the  capital  stock  of  little  value  for  tax  purposes. 
Not  only  do  bonds  contribute  to  the  evasion  of  the  tax, 
but  the  very  fact  that  they  are  issued  influences  the  classi- 
cation  of  a  corporation  for  the  purpose  of  taxation.  Bond 
issues  keep  down  dividend  rates,  which,  according  to  the 
law,  are  the  basis  upon  which  classification  is  to  be  made. 
In  cases  where  the  tax  is  based  upon  the  average  market 
value  of  the  stock  a  heavy  bond  issue  might  materially 
reduce  the  assessment. 

It  is  generally  believed  that  the  corporate  form  gives 
advantages  for  which  the  corporation  should  pay.  If 
the  capital  stock,  through  the  annual  franchise  tax,  be 
taken  as  the  basis  for  this  payment,  the  system  should 
be  clarified  and  simplified.  The  confusion  arising  from 
court  decisions  between  capital  stock  and  capital  as  basis 
for  the  tax  should  be  cleared  up.  Capital  stock  is  general- 
ly taken  to  mean  the  share  value,  the  actual  value  of  which, 
depending  upon  a  variety  of  causes,  may  change  from  day 
to  day.  This  in  itself  would  be  an  inefficient  basis,  but 
might  well  be  used  as  a  factor  in  determining  the  value  of 
capital.  By  capital  we  generally  mean  the  definite  tangible 
or  intangible  assets  with  which  a  corporation  may  do  busi- 
ness. Under  this  would  come  personal  and  real  property, 
such  as  cash,  accounts  receivable,  merchandise,  and  all 
items  such  as  trade  marks,  good  will,  etc.,  which  enable  a 
company  to  carry  out  those  purposes  for  which  it  was  form- 
ed. Since  such  items  are  not  always  accurately  reflected 
in  the  share  value  the  capital  would  form  a  much  better 
basis  for  the  tax.  The  rules  for  classification,  however, 
should  be  simplified  and  the  duties  of  the  comptroller 
lightened.  The  application  of  the  present  system  to  some 
forty     thousand     corporations     involves     an     enormous 


PROBLEMS  AND  DIFFICULTIES,  GENERAL  TAX  ON  CORPORATIONS  43 

amount  of  clerical  work,  and  renders  it  difficult  to  detect 
inaccuracies. 

The  complexity  of  the  law  is  a  disadvantage.  In 
1893  the  legislative  committee  investigated  the  matter  of 
taxation.  This  inquiry  showed  that  the  complexity  of  the 
law — and  subsequent  amendments  have  made  it  still  more 
complex — had  caused  many  corporations  to  leave  the 
state.  The  witnesses  before  the  committee  contended  for 
the  simplification  of  the  laws  so  that  corporations  could 
know  what  to  pay  and  what  might  be  collected.  The 
law  has  not  been  constructed  on  a  scientific  basis  but  has 
been  made  piece  meal  by  different  legislatures.  Mr. 
George  F.  Seward  said :  "It  is  hardly  conceivable,  yet 
true,  that  one  cannot  find  by  study  of  the  statutes,  any 
indication  that  the  work  of  any  of  these  commissions 
which  have  been  apopinted  during  the  last  forty  years, 
or  all  of  them  together,  have  made  any  impression  upon 
the  legislature."5  The  use  of  these  complex  measures 
for  taxing  corporations  instead  of  adopting  some  care- 
fully worked  out  system  has  resulted  in  seriously  burden- 
ing some  while  others  have  practically  escaped  taxation. 
Governor  Dix  is  his  message  of  July  12,  191 16  vigor- 
ously attacked  the  complexity  of  the  law : 

Section  182,  under  which  corporations  are  taxed  for  the  priv- 
ilege of  doing  business  in  a  corporate  capacity,  has  been  a  con- 
stant source  of  litigation.  It  is  so  complicated  that  no  ordinary 
business  man  can  understand  its  provisions  and  even  the  Court 
of  Appeals  has  complained  that  the  legislature  seems  to  have 
tried  to  express  a  very  simple  idea  in  very  complicated  language. 
Yet  over  forty  thousand  business  corporations  are  assessed  an- 
nually under  this  statute  and  are  compelled  to  make  reports  in 
regard  to  which  their  officers  are  in  hopeless  confusion  and  even 
their  attorneys  are  frequently  bewildered  in  their  efforts  to  com- 
ply with  its  provisions. 

The  law  is  difficult  to  interpret  and  as  a  result  of  its 
vagueness  and  complexity  millions  of  dollars  are  levied 
with  no  certain  rule.  The  assessment,  moreover,  is  left 
to  one  official  with  no  possibility  of  proper  check  or  sup- 
ervision. The  public  can  generally  neither  know  the 
basis  of  taxation  nor  whether  the  amounts  collected  are 
proper  or  not. 

8  National  Conference  on  Taxation,  Buffalo,  1901.  p.  116. 
'Public  Papers  of  Governor  Dix,  1911,  p.  73. 


44  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

The  complexity  of  the  situation  has  discouraged  rath- 
er than  encouraged  the  collection  of  the  tax.  Courts  have 
been  busy  determining  which  provisions  of  the  law  applied 
to  different  companies.  In  one  case  at  least  they  removed 
from  the  list  one  whole  class  of  property  that  had  hither- 
to paid  the  tax.7  The  decision  held  that  a  company  or- 
ganized for  the  purpose  of  purchasing  and  holding  real 
estate  was  not  employing  its  capital  in  doing  business  in 
the  state.  In  this  particular  case  the  amount  invested  was 
$150,000.  Soon  after  the  investment  the  property  was 
sold  for  $750,000  which  would  indicate  that  the  company 
had  employed  its  capital  in  a  fairly  satisfactory  business 
transaction.  In  one  year  the  decision  caused  541  cor- 
porations to  be  removed  from  the  tax  roll.  This  is  but 
an  example  of  situations  arising  because  of  lack  of  clear- 
ness. Here  capital  was  "invested"  and  not  "employed" — 
hence  the  law  did  not  apply.  The  Comptroller  suggested 
that  if  capital  could  be  "invested"  without  being  "employ- 
ed" it  was  time  to  so  word  the  statute  that  capital  employ- 
ed, invesed  or  held  in  the  state  would  come  under  the  law. 
While  this  class  of  capital  escaped  entirely  others  have 
been  unduly  burdened,  and  it  was  generally  believed  that 
large  sums  of  New  York  capital  sought  incorporation  in 
other  states.  Governor  Odell,  in  his  message  of  19018 
pointed  out  that  corporations  were  treated  more  liberally 
in  other  states  than  in  New  York.  This  forced  the  capi- 
tal to  other  states  and  New  York  lost  the  revenue  which 
they  enjoyed  at  her  expense.  He  pointed  out  that  dur- 
ing the  previous  year  only  $340,000,000  was  organized 
under  New  York  laws  while  single  corporations  with  a 
greater  capitalization  than  this  had  been  organized  in 
other  states. 

This  chaotic  and  complicated  tax  law  can  be  account- 
ed for  because  of  the  way  by  which  it  came  into  exist- 
ence. The  demands  for  revenue  increased  more  than 
eight  times  as  fast  as  the  population.  As  these  new  de- 
mands for  revenue  arose  a  new  tax  was  imposed  to  meet 

'Annual  Report  of  New  York  State  Comptroller,  1900,  p.  xix. 
'Governor   Odell's    Message,    1901.     Assembly   Documents,    1901, 
Vol.  1.  No.  2. 


PROBLEMS  AND  DIFFICULTIES,  GENERAL  TAX  ON  CORPORATIONS  45 

the  need  and  finally  became  imbedded  as  a  part  of  the 
regular  system.  That  legislators  allow  such  a  system  to 
continue  is  not  because  they  have  never  had  their  atten- 
tion called  to  conditions.  Practically  every  official  and 
organization  connected  with  tax  administration  or  inter- 
ested in  tax  reform  has  pointed  out  the  difficulties  and 
asked  for  remedies.  The  State  Comptroller  in  his  report 
for  1899  said:  "It  is  unfortunate,  both  as  regards  the 
tax  payer  and  the  subject  of  taxation  that  many  cases 
arise  where  the  determination  of  the  courts  must  be  had, 
and  where  often  times  the  tax  assessed  and  collected  is 
inequitable  and,  aside  from  the  letter  of  the  statute  law, 
has  no  justification.n."9  The  opinions  expressed  in  prac- 
tically every  other  Comptroller's  report  have  been  simi- 
lar, always  decrying  the  complications  and  asking  for 
simplicity  and  justice.  The  newspapers  have  repeatedly 
laid  bare  difficulties  and  criticized  those  responsible  for  not 
giving  relief.  A  number  of  special  tax  commissions  have 
been  appointed  to  investigate  the  system  which  generally 
reported  the  cumbersomeness  of  the  law.  The  Commis- 
sioners of  Taxes  and  Assessments  for  New  York  city  have 
been  active  in  advocating  reform  while  the  New  York 
Tax  Reform  Association  has  repeatedly  drawn  up  laws 
and  amendments,  and  attempted  in  almost  every  con- 
ceivable way  to  get  some  change. 

A  number  of  loop  holes  exist  through  which  evasions 
are  possible,  and  which  cause  more  inequality  and  in- 
justice than  should  exist.  Since  the  courts  have  held 
that  the  taxes  are  a  payment  for  past  benefits  and  not  for 
future  privileges,  a  number  of  corporations,  especially 
foreign,  moved  out  of  the  jurisdiction  of  the  state  just 
before  being  assessed.  The  amount  of  revenue  lost  by 
such  practices  is  considerable.  The  use  of  the  amount  of 
capital  "employed  in  doing  business  in  this  state"  as  a 
basis  for  the  tax  allows  much  capital  to  escape  taxation. 
This  is  especially  true  of  foreign  corporations  and  will 
be  discussed  in  Chapter  IV. 

Corporations  which  pay  the  annual  franchise  tax  are 

9  Annual  Report  New  York  State  Comptroller,  Assembly  Docu- 
ments, 1899,  Vol.  1,  No.  3. 


46  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

exempt  locally  from  all  taxation  upon  personal  property 
for  state  purposes.  Since  the  real  estate  is  not  exempt, 
injustice  is  borne  by  the  corporation  with  a  comparative- 
ly large  amount  of  real  estate.  The  State  Comptroller  in 
his  report  for  1900,10  said  that  a  company  doing  manufac- 
turing business  pretty  generally  took  advantage  of  the 
provision.  For  example,  he  said,  a  company  may  em- 
ploy one  or  two  thousand  dollars  in  handling  goods  of 
other  makers  and  pay  a  tax  of  a  few  dollars.  By  doing 
this  it  secures  exemption  from  local  taxation  on  personal 
property  for  state  purposes  when  it  may  have  several 
thousand  dollars  which  would  otherwise  be  subject  to 
such  tax.  This  again  discriminates  unjustly  against  the 
holder  of  a  large  amount  of  real  estate.  Stock-watering 
has  also  been  extensively  practiced.  This  keeps  the  rate 
of  dividend  low,  and  puts  the  corporation  in  a  class  with 
lower  taxation  even  though  the  return  upon  the  actual 
investment  may  be  high. 

The  methods  employed  for  dealing  with  delinquent 
companies  have  not  been  entirely  satisfactory.  The  pro- 
cedure is  for  the  Comptroller  to  issue  a  warrant  to  the 
county  sheriff,  ordering  him  to  sell  the  property  of  the 
company  in  order  to  satisfy  the  tax  claims.  It  is  difficult, 
however,  for  the  sheriff  to  sell  such  intangible  property 
as  good  will,  services,  etc.  Neither  have  sheriffs  appear- 
ed to  be  over-zealous  in  attempting  to  find  property  upon 
which  to  levy  a  tax  claim.  When  it  is  found,  moreover, 
it  is  often  so  heavily  encumbered  that  under  a  sheriff's 
sale  there  would  be  little  equity  left  to  the  state  to  satisfy 
taxes  and  cost  of  collection.  An  attempt  has  been  made 
to  deal  with  delinquents  through  annulling  their  char- 
ters. If  a  tax  account  remains  unpaid  for  a  year  and  the 
Comptroller  is  satisfied  that  the  delay  is  intentional,  he 
notifies  the  Attorney-General  to  bring  action  to  annul 
the  charter. 

The  method  of  dealing  with  other  forms  of  delinquen- 
cy, such  as  failures  to  file  a  report,  is  also  inadequate,  ex- 
pensive, and  time  consuming.  Action  must  be  by  the 
Attorney-General  at  the  instance  of  the  Comptroller.     In 

M  Annual  Report  of  the  New  York  State  Comptroller,  1900,  p.  xxi. 


PROBLEMS  AND  DIFFICULTIES,  GENERAL  TAX  ON  CORPORATIONS  47 

many  cases  enforcement  is  practically  impossible.  This 
system  may  have  been  fairly  efficient  when  it  was  inaugu- 
rated  for  then  there  were  only  some  two  thou- 
sand corporations  on  the  taxing  list,  but  there  are  now 
more  than  forty  thousand  demanding  the  attention  of 
the  bureau.  More  than  five  per  cent  of  these,  moreover, 
are  delinqunt  in  some  way  every  year.  To  expect  the 
Attorney-General  annually  to  commence  proceedings  in 
over  eight  hundred  cases  is  unreasonable.  Annulment  of 
the  charter  by  the  Comptroller  in  cases  of  intentional  de- 
linquency would  perhaps  be  an  adequate  remedy.  This 
would  have  the  incidental  advantage  of  doing  away  with 
a  number  of  corporations  which  exist  only  on  paper. 

The  taxation  system  has  been  severely  criticized  be- 
cause it  does  not  place  the  same  burden  upon  individuals 
as  is  placed  upon  corporations.  By  individuals  is  meant  the 
large  business  organizations  in  the  form  of  partnerships. 
The  regulations  applicable  to  corporations  do  not  apply 
to  individuals.  Corporations  are  subject  to  special  kinds 
of  taxation  which  individuals  escape.  Many  examples 
exist  where  corporations  are  burdened  much  more  heavily 
than  other  companies  doing  practically  the  same  kind  of 
business.  The  manner  of  assessment  is  entirely  differ- 
ent. Corporations  must  prepare  technical  and  compli- 
cated reports  which  make  the  advice  of  an  attorney  neces- 
sary while  the  individual,  taxed  only  locally,  is  assessed 
before  the  local  assessor.  Individuals  may  deduct  all 
personal  debts  while  no  such  deductions  are  allowed  to 
corporations.  Granting  these  discrepancies,  we  cannot 
conclude,  however,  that  all  business  organizations  should 
be  taxed  on  the  same  basis.  In  so  far  as  the  corporate 
charter  grants  advantages  and  privileges  there  is  no  rea- 
son why  they  should  not  be  compensated  for  in  the  form 
of  taxes.  If  the  price  asked  be  too  high  there  is  nothing 
to  compel  new  business  enterprises  to  take  on  the  corpor- 
ate rather  than  the  partnership  form.  A  heavy  tax  on 
corporations,  however,  may  prove  to  be  an  unjust  burden 
to  those  already  in  existence.  For  many  corporations  it 
would  be  next  to  impossible  to  change  to  a  partnership 
organization.     Since  corporations  have  proved  particu- 


48  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

larly  efficient  in  the  development  of  industry  and  there- 
fore socially  desirable,  taxes  should  not  be  so  oppressive 
as  to  discourage  this  form  of  organization. 

These  are  some  of  the  difficulties  connected  with  tax- 
ing corporations  for  state  purposes.  The  assessments  of 
corporate  property,  both  real  estate  and  capital  stock,11 
for  local  purposes  likewise  presents  difficulties.  Although 
statistics  for  local  taxes  are  not  available,  there  is  no 
doubt  that  the  aggregate  is  much  larger  than  the  taxes 
paid  for  state  purposes.  The  assessments  are  made  by 
local  officials  under  practically  the  personal  property  tax 
system.  Here  the  evils  of  the  system  are  enhanced  by  the 
complexity  and  magnitude  of  the  assessments.  Real 
estate  is  assessed  at  its  situs  while  the  capital  stock  is 
assessed  at  the  place  of  the  principal  office.  Since  corpo- 
tions  may  choose  the  place  for  their  principal  office  it  is 
possible  to  shift  this  from  one  district  to  another  to  escape 
taxation.  Instances  have  arisen,  both  among  domestic 
and  foreign  corporations,  where  this  has  been  done. 
Where  the  shifting  is  with  a  view  to  securing  better  terms 
of  assessment  it  is  sometimes  done  with  the  collusion  of 
local  tax  officials.  Assessors  are  sometimes  lenient  in 
order  to  get  the  corporation  to  declare  its  principal  office 
in  their  district.  Many  New  York  city  corporations, 
whose  business  is  practically  all  located  there,  have  de- 
clared their  principal  office  to  be  located  elsewhere.  Such 
practices,  of  course,  work  injustice  among  districts  and 
among  corporations.  The  very  possibility  of  its  existence 
is  enough  to  condemn  it  and  demand  reform. 

The  valuation  of  real  estate  by  the  different  assessors 
affords  a  special  problem  in  the  case  of  corporations. 
Very  often  the  assessor  can  only  take  the  officers'  word 
for  the  valuation  since  he  himself  is  not  competent  to 
judge.  Different  districts  are  desirous  of  increasing 
their  population  and  business  by  having  industries  locate 

"Article  1,  Section  11  of  the  tax  law  would  indicate  that  all  per- 
sonal property  was  to  be  assessed  and  taxed  locally.  In  the  instruc- 
tions for  preparing  the  assessment  roll,  section  21,  however,  pro- 
vision is  made  only  for  assessing  the  capital  stock  as  provided  for 
in  section  12.  This  causes  only  capital  stock  to  be  assessed  and  is 
another  illustration  of  the  inconsistency  of  the  tax  law. 


PROBLEMS  AND  DIFFICULTIES,  GENERAL  TAX  ON  CORPORATIONS  49 

within  their  borders,  and  promises  of  low  taxes  are  often 
given  as  an  inducement.  Injustice  is  found  here  as  well 
as  in  the  assessment  of  personal  property  and  measures 
are  needed  to  abolish  the  practices  which  exist. 

The  method  prescribed  by  law  for  the  assessment  and 
taxation  of  the  personal  property  of  corporations  for  local 
purposes  is  so  complex  that  few,  if  any  local  assessors  are 
able  to  apply  it.  It  is  not  the  value  of  the  share  stock 
that  is  the  basis  of  taxation,  but  rather  he  capital  invested 
in  the  business.  The  formula  which  the  assessors  are  ex- 
pected to  use  is  somewhat  as  follows :  On  one  side  of 
the  assessment  roll  is  to  be  placed  the  value  of  the  total 
assets  of  the  corporation  including  the  entire  value  of 
real  as  well  as  personal  property,  non-taxable  as  well  as 
taxable.  From  this  is  to  be  deducted  the  other  side  of  the 
assessment  roll  on  which  is  found  the  value  of  the  stock 
owned  by  the  state  and  incorporated  charitable  or  literary 
societies ;  all  property  exempt  by  law,  including  shares  of 
stock  of  other  corporations ;  the  assessed  value  of  the  real 
estate ;  debts  and  surplus,  if  any,  up  to  the  amount  of  ten 
per  cent  of  the  capital. 

The  sum  secured  by  this  process  represents  the  assess- 
able value  of  the  capital  stock.  Corporations  are  requir- 
ed to  make  reports  but  the  information  thus  obtained  is 
so  inadequate  as  to  be  of  little  use  to  the  assessors.  Since 
judges  and  lawyers  have  failed  to  reach  an  agreementn  as 
to  the  meaning  of  the  law,  the  assessors  cannot  be  ex- 
pected to  use  it  successfully.  They  generally  assess  indi- 
viduals and  corporations  in  the  same  manner.  Since  per- 
sonalty so  largely  escapes  an  unjust  burden  falls  upon 
corporations  with  a  large  percentage  of  real  estate. 

Because  of  these  difficulties  many  have  advocated 
that  the  local  assessment  of  personal  property  of  corpor- 
ations be  abolished.  The  State  Tax  Commission  in  1898 
made  such  a  recommendation.12  It  contended  that  the 
other  corporate  taxes  involved  the  taxation  of  personalty. 
It  wanted  to  equalize  and  extend  the  other  taxes  so  as  to 
reach  the  source  of  personal  investment,  and  at  the  same 
time  relieve  the  assessors  of  the  hopeless  task  of  finding 

"Annual  Report  of  New  York  State  Tax  Commission,  1898,  p.  11. 


50  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

personal  property.  The  special  tax  commission  which  re- 
ported in  190713  thought  it  advisable  to  extend  the  sys- 
tem of  taxing  corporations  for  state  purposes  so  as  to  in- 
clude all  corporation  taxes.  It  would  allow  real  estate  to 
continue  to  be  taxed  locally,  but  all  personal  property 
taxes  were  to  be  taken  care  of  through  an  increased  fran- 
chise tax,  a  part  of  which  was  to  be  returned  to  the  local- 
ity. Such  a  scheme  was  calculated  to  give  greater  equity 
and  more  revenue  to  both  the  state  and  the  locality. 

The  State  Comptrollers  for  a  numbei  of  years  have 
been  asking  for  reform  but  without  success.  The  State 
Conference  on  Taxation  in  191 1  unanimously  adopted  a 
resolution  asking  that  the  taxes  be  determined  by  some 
simple  rule.  Governor  Dix  in  his  message  of  191 1  dealt 
extensively  with  corporate  taxation  and  asked  for  re- 
form.14 He  suggested  that  the  annual  franchise  tax  be 
computed  upon  the  par  value  of  the  stock.  This  would 
insure  simplicity  in  calculation  which  any  tax-payer  could 
understand,  and  would  also  eliminate  the  necessity  for  the 
frequent  arbitrary  judgment  of  taxing  officials.  He  gave 
his  sanction  to  a  bill  which  had  been  introduced  proposing 
a  minimum  tax  of  three-fourths  of  a  mill  on  each  dollar 
of  issued  capital  stock.  This  was  designated  as  a  tax  for 
the  privilege  of  using  a  corporate  name  and  exercising 
corporate  power.  Taxes  were  to  vary  with  different 
classes  of  corporations  depending  upon  the  amount  of 
dividends  paid. 

This  scheme  evidently  would  have  been  easy  to  under- 
stand and  administer,  and  would  doubtless  have  eliminat- 
ed much  of  the  litigation  caused  by  the  present  procedure. 
It  would  act  as  a  check  upon  taxing  officials  since  in  each 
case  the  amount  of  the  tax  paid  could  easily  be  compared 
with  the  basis  upon  which  it  was  levied.  A  further  ad- 
vantage would  arise  in  the  tendency  to  reduce  inflated 
capitalizations.  As  a  license  tax  little  objection  can  be 
made  to  the  scheme. 

■  Report   of   the    Special   Tax   Commission,    1907,    Senate    Docu- 
ments, 1907,  Vol.  5,  No.  11. 

u  Message  of  Governor  Dix.     Public  Papers   of  Governor   Dix, 
1911,  p.  73. 


PROBLEMS  AND  DIFFICULTIES,  GENERAL  TAX  ON  CORPORATIONS  51 

The  report  of  the  Comptroller  for  191 1  dwelt  on  the 
ambiguity  and  uncertainty  of  construction  in  the  law. 
Although  his  recommendations  were  adopted  by  the  Sen- 
ate, they  failed  to  reach  a  vote  in  the  House.  At  the  ex- 
traordinary session  of  that  year  he  made  another  unsuc- 
cessful attempt.  He  suggested  that  the  annual  franchise 
tax  be  upon  the  basis  of  capital  stock.  The  tax,  to  be 
paid  annually  in  advance,  was  to  be  computed  upon  the 
basis  of  the  capital  stock  employed  during  the  preceding 
year  within  the  state.  The  amount  of  capital  stock  was 
to  be  such  portion  of  the  issued  capital  stock  as  the  gross 
assets  of  the  business  in  the  state  bore  to  the  entire  gross 
assets.  The  tax  rate  was  to  vary,  according  to  dividends 
paid,  from  three-fourths  of  a  mill  where  no  dividends 
were  paid  to  one-fourth  of  a  mill  for  each  one  per  cent  of 
dividends  above  six  per  cent.  The  minimum  tax  was 
fixed  at  five  dollars.  The  scheme  would  have  eliminat- 
ed many  of  the  administrative  difficulties  yet  some  injus- 
tice would  doubtless  have  remained. 

The  organization  tax  has  been  much  discussed.  It  is 
generally  connected  with  the  phrase  "driving  capital  from 
the  state/'  If  the  organization  tax  be  high  it  is  believed 
capital  will  seek  organization  in  the  more  favorable  states. 
From  the  standpoint  of  revenue  this  could  make  little 
difference  aside  from  the  organization  tax  itself,  if  the 
foreign  corporation  tax  laws  are  properly  framed.  The 
possibility  exists,  however,  that,  where  advantages  of  lo- 
cation are  negligible,  and  industry  may  seek  the  state  of 
lower  organization  tax.  The  loss  comes  largely  to  the 
forms  of  business  which  would  partially  depend  upon  the 
industry  if  located  within  the  state.  While  the  organiza- 
tion tax  does  not  have  the  effect  commonly  supposed  it 
may  be  well  to  gauge  it  somewhat  by  similar  taxes  in 
other  states. 

The  complete  separation  of  the  sources  of  state  and 
local  revenues  has  been  advocated  by  some  as  a  cure-all 
for  tax  evils.  No  doubt  some  sources  of  revenue  are  bet- 
ter suited  for  state  taxation,  and  should  be  taken  over 
by  the  state.  The  great  body  of  local  tax  payers  should 
not  be  freed,  however,  from  all  state  responsibility.     In 


52  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

New  York  a  small  amount  of  the  taxes  collected  locally 
are  used  for  state  purposes.  Under  complete  separation 
the  great  majority  of  voters  would  have  no  interest  in 
the  state  revenues  other  than  how  they  would  be  spent. 
Who  would  bear  the  expense,  would  be  of  little  concern 
and  it  is  not  hard  to  imagine  that  unwise  and  burdensome 
appropriations  might  be  made.  However  desirable  the 
separation  of  state  and  local  revenues  may  be  from  the 
administrative  standpoint,  the  social  defects  overshadow 
the  advantages.  In  order  that  the  majority  of  the  citizens 
retain  their  interest  in  state  offairs  and  may  not  be  tempt- 
ed to  squander  revenues  they  do  not  help  to  pay,  it  is  de- 
sirable that  a  part  of  the  locally  collected  taxes  be  used 
for  state  purposes. 

It  seems  the  personal  property  tax  is  strongly  in- 
trenched. Many  tax  authorities  would  willingly  adopt 
the  income  basis.  The  past  lethergy  of  the  legislature, 
however,  would  indicate  that  we  need  not  expect  such  a 
step  in  the  near  future.  The  first  reform  we  can  hope  to 
secure  is  to  make  the  old  system  more  workable  as  well 
as  more  just.  In  the  past  recommendations  of  officials 
and  commissions  have  met  with  little  sucess.  The  recent 
success  of  reforms,  however,  in  other  phases  of  taxation, 
leads  us  to  hope  that  the  legislature  will  yet  attempt  to 
simplify  corporate  taxation.  The  sooner  this  can  be  ac- 
complished, through  the  adoption  of  some  suggestion  al- 
ready made  or  otherwise,  the  sooner  will  the  courts  be 
relieved  of  part  of  their  burdens,  the  sooner  will  cor- 
porate officials  be  able  to  calculate  the  amount  of  taxes 
they  may  be  expected  to  pay,  and  the  sooner  will  state 
officials  be  relieved  from  much  of  the  unnecessary  admin- 
istrative burden  now  borne  by  them. 

THE   STOCK   TRANSFER   TAX15 

Before  leaving  the  discussion  of  the  general  taxation 
fer  tax.  In  1881  a  bill  was  introduced  proposing  to  levy  a 
tax  of  one-fifth  of  a  mill  on  every  dollars  of  brokers'  sales. 
of  corporations  we  shall  briefly  consider  the  stock  trans- 

u  In  reality  this  is  not  a  tax  upon  corporations  but  upon  the  ex- 
change or  sale  of  shares  of  stock.  It  does,  however,  affect  them 
indirectly. 


PROBLEMS  AND  DIFFICULTIES,  GENERAL  TAX  ON  CORPORATIONS  53 

In  1887  a  bill  was  introduced  to  tax  the  sales  of  stocks 
and  bonds.  Neither  bill  became  a  law,  and  it  was  not 
until  several  years  later  that  the  subject  came  up  again. 
In  1905  the  stock  transfer  tax  law  was  added  to  the  gen- 
eral tax  law.16  By  this  act  a  tax  of  two  cents  on  every 
$100,  face  value,  was  placed  upon  the  sale  or  exchange 
of  shares  and  certificates  of  stock  of  all  foreign  and  do- 
mestic corporations  after  June  i,  1905.  Depositing  stock 
as  collateral  security  is  not  taxable.  The  payment  of 
the  tax  is  denoted  by  affixing  adhesive  stamps,  either  to 
books  of  company  making  sale  (if  sale  be  recorded)  or  to 
the  memorandum  or  certificate  of  transfer  where  such  is 
given.  Heavy  penalties  are  provided  for  failure  to  affix 
stamps,  using  canceled  stamps,  etc.,  while  shares  of  stock 
transferred  without  the  payment  of  the  tax  cannot  be 
made  the  basis  of  legal  proceedings. 

As  might  be  expected  the  constitutionality  of  the  law 
was  attacked  from  every  possible  angle.  The  greatest  con- 
tention was  that  it  is  class  legislation,  hence  contrary  to 
state  and  federal  constitutions.  Both  the  Court  of  Ap- 
peals17 and  the  United  States  Supreme  Court  held  that  the 
tax  was  not  upon  property  but  upon  the  transfer  of  prop- 
erty. Since  it  was  uniform  in  operation  upon  all  trans- 
fers and  upon  all  persons  making  them,  it  contravened 
neither  the  state  nor  federal  constitution.  The  complaint 
upon  interstate  commerce  was  likewise  rejected. 

In  190718  the  law  was  amended  so  as  to  make  the  basis 
for  the  tax  "each  share  of  $100  of  face  value  or  fraction 
thereof,"  instead  of  "each  $100  of  face  value  or  fraction 
thereof."  The  amendment  made  the  share,  whatever  its 
value,  the  basis  for  the  tax.  By  its  provisions  the  tax  on 
100  ten  dollar  shares  would  be  two  dollars  while  the  tax 
on  ten  one  hundred  dollar  shares  would  be  twenty  cents. 
In  these  two  cases  the  share  value  was  the  same  yet  the 
tax  differed  by  one  dollar  and  eighty  cents.  The  Court 
of  Appeals  refused  to  sanction  such  discrepancies  on  the 
ground  of  class  legislation  since  all  corporate  share  hold- 

MNew  York  Statutes,  1905,  Chap.  241. 

"  Hatch  vs  Reardon,  184  N.  Y.,  431.     Affirmed  204  U.   S.,  157. 

M  New  York  Statutes,  1907,  Chap.  414. 


54  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ers  were  not  treated  alike.  The  legislature  had  exceeded 
their  power  of  classification  since  such  must  have  some 
other  basis  than  mere  accident,  whim  or  caprice.19  The 
provision  of  the  law  which  authorized  the  comptroller  to 
secure  evidence  of  violation  from  the  private  books  of  the 
company  was  likewise  declared  unconstitutional.20.  Cer- 
tificates of  shares  turned  over  to  a  trust  company  under 
the  voting,  trust  arrangement,  however,  were  held  liable 
to'  the  tax.21 

The  Comptroller  has  experienced  difficulties  in  examin- 
ing the  records  of  offices  to  ascertain  whether  the  law 
has  been  complied  with.  At  first  the  state  was  defrauded 
of  thousands  of  dollars  because  of  the  wholesale  washing 
and  reusing  of  stamps.  Detectives  were  put  to  work, 
however,  the  offenders  arrested,  and  the  practice  in  a 
measure  checked.  Evasions,  it  would  seem,  are  still  pos- 
sible since  the  amount  of  sales  reported  on  the  exchanges 
is  much  larger  than  the  sale  of  stamps  would  indicate. 
The  system  of  "balancing"  and  "paying  on  differences" 
which  is  used  among  brokers  will  partially  explain  the 
difference. 

Because  of  evasions,  the  Comptroller,  in  his  report 
for  1908,  estimated  that  the  state  was  losing  $2,000,000 
a  year.  He  suggested  as  a  corrective  measure  that  every 
person  selling  shares  be  required  to  make  a  monthly  state- 
ment showing  the  amount  of  sales,  together  with  the  de- 
nomination and  number  of  stamps  used  in  paying  the  tax. 
The  system  recommended  was  practically  the  same  as  is 
used  in  the  United  States  revenue.  The  desired  modifi- 
cations were  not  secured.  In  1910  a  bill  making  it  un- 
lawful for  any  but  authorized  agents  to  sell  stamps,  and 
then  only  at  face  value,  passed  the  Senate.  In  the  House 
the  opposition  which  developed  in  the  interests  of  the 
stamp  dealers  caused  the  defeat  of  the  bill.  A  second  at- 
tempt was  made  at  the  extraordinary  session  but  with 
similar  results.     It  was  not  long,  however,  until  a  law22 

M  Farrington  vs  Mensching,  187  N.  Y.,  8. 

"Ferguson  vs  Reardon,  197  N.  Y.,  236. 

21  U.  S.  Radiator  Company  vs  New  York,  208  N.  Y.,  144. 

MNew  York  Statutes,  1911,  Chap.  12. 


PROBLEMS  AND  DIFFICULTIES,  GENERAL  TAX  ON  CORPORATIONS  55 

was  passed  permitting  only  authorized  agents  and  banks 
to  sell  stamps.  This  has  been  effective  in  cutting  down 
losses  from  fraudulent  transactions.  It  has  also  been 
made  the  duty  of  the  person  making  the  sale  to  procure 
and  affix  the  stamps.  Corporations  must  keep  such  re- 
cords as  the  Comptroller  may  require,  showing  date  of 
transfer,  numbers  of  certificate  issued  and  names  of  pur- 
chaser.    Such  records  must  be  kept  for  two  years. 

The  tax  met  with  opposition,  not  alone  from  those 
directly  affected  but  from  other  sources.  Just  after  its 
constitutionality  had  been  affirmed,  it  was  attacked  on  the 
ground  that  it  established  a  dangerous  precedent  for  the 
taxation  of  energy  and  industry.23  New  York  city  bus- 
iness men  felt  that  it  was  a  discrimination  against  the 
city.  The  law  had  the  effect  of  checking  the  increase  of 
transactions  on  the  stock  exchange.  Transactions  in- 
creased much  more  rapidly  on  the  Boston  and  Philadel- 
phia exchanges  than  on  the  New  York  exchange.24  If 
the  law  can  be  shown  to  greatly  check  stock  exchange 
transactions  its  advisability  can  be  questioned.  The  stock 
exchange  is  not  all  a  gambling  den  and  productive  of  no 
good  as  is  generally  believed.  It  exercises  an  important 
function  in  establishing  a  comparatively  stable  market  for 
securities  which  greatly  aids  the  progress  of  industry. 

It  has  been  advocated  that  the  tax  be  increased  from 
two  to  five  cents.  There  is  just  as  much  reason  for  choos- 
ing the  one  as  the  other,  it  is  claimed,  while  the  latter 
would  greatly  enhance  the  revenue.  The  revenue  now 
secured  is  quite  large  and  it  would  be  well  to  leave  any 
possible  increase  till  an  emergency  arises  when  it  can  be 
used  to  provide  the  flexible  feature  which  a  good  tax  sys- 
tem should  possess.  It  would  be  better,  in  some  ways,  if 
the  tax  were  based  upon  the  market  rather  than  the  par 
value  of  the  stock.  There  is  no  very  good  reason  for 
taxing  a  one  hundred  dollar  share  selling  for  three  hun- 
dred dollars  as  much  as  one  selling  for  twenty-five  dol- 
lars.      A  market  value  basis,  however,  would  increase 

M  The  Outlook,  May  5,  1906.    Vol.  83,  p.  5. 

"Pennsylvania    adopted    the    stock   transfer    tax    in    1915    while 
Massachussets  adopted  it  the  previous  year. 


56  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

the  administrative  difficulties  of  the  tax.  In  general  it  is 
a  fair  tax,  easily  assessed  and  productive  of  considerable 
revenue. 


CHAPTER   IV 

THE   TAXATION   OE    FOREIGN    CORPORATIONS 

The  treatment  of  foreign  corporations  in  New  York 
State  has  varied  widely.  The  legislature  has  dealt  with 
such  corporations,  either  by  enacting  statutes  which  af- 
fected the  class  as  a  whole  or  by  laws  designed  for  a  par- 
ticular kind,  as  insurance  companies  or  banks.  We  find 
that  the  first  legislation  was  most  drastic.  Until  the 
year  1814  the  insurance  business  was  left  entirely  open 
to  all  who  chose  to  undertake  it.  In  that  year  the  Phoenix 
Fire  Insurance  Company  of  London  established  an  agency 
in  New  York.  Since  at  this  time  England  and  the  United 
States  were  at  war  and  contracts  with  alien  enemies  could 
not  be  enforced,  a  bill,  entitled,  "An  Act  to  Suppress 
Foreign  Influence  in  this  State,"  was  introduced  into  the 
legislature.  After  an  amendment  had  been  added,  which 
explained  the  object  of  the  bill,  it  became  a  law.1  All 
foreign  insurance  companies  or  their  agencies  were  ex- 
cluded from  carrying  on  business  in  the  state  under  a 
penalty  of  one  thousand  dollars  for  violation.  This  oc- 
curred at  a  time  of  exasperated  feelings  toward  England 
but  it  had  a  marked  influence  upon  later  legislation  con- 
cerning alien  insurance  companies.  This  action  was  not 
intended  to  apply  to  companies  which  were  chartered  by 
other  states  and  doing  business  in  New  York,  but  it  was 
not  long  before  laws  dealing  with  this  class  were  added. 

Since  at  this  period  insurance  companies  were  the  only 
foreign  coporations  which  did  business  of  any  importance 
within  the  state,  the  laws  were  made  applicable  to  this 
class  alone.  A  law  passed  in  18242  stipulated  that  any 
person  who  thereafter  acted  as  an  agent  for  any  individ- 

1  New  York  Statutes,  1814,  Chap.  49! 

2  New  York  Statutes,  1824,  Chap.  257. 

57 


58  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ual  or  association  of  individuals  which  was  not  incor- 
porated under  New  York  law,  (even  though  they  were 
formed  under  laws  of  other  states)  for  the  purpose  of  car- 
rying on  a  fire  insurance  business,  must  render  to  the 
comptroller  an  annual  sworn  statement  of  the  amount  of 
premiums  which  he  or  any  other  person  had  received  for 
insurance  effected  by  him.  The  statement  was  to  be  for 
the  year  ending  September  first,  and  on  or  before  Febru- 
ary first  he  was  to  pay  into  the  state  treasury  ten  per 
cent  on  the  amount  of  all  premiums.  To  insure  that  the 
stipulated  returns  would  be  made  a  bond  of  one  thousand 
dollars  was  required  of  every  agent.  If  such  were  not 
furnished  within  three  months  after  the  passage  of  the 
act  he  was  to  be  fined  five  hundred  dollars.  This  was  the 
system  by  which  the  foreign  companies  were  taxed  until 
1837  when  the  law3  was  modified  so  as  to  reduce  the  tax 
on  premiums  from  ten  per  cent  to  two  per  cent.  Domestic 
companies  came  under  the  general  corporation  tax  law  of 
1823  and  were  taxed  upon  capital  stock  while  the  foreign 
ones  were  taxed  upon  premiums  received.  This  lack  of 
uniformity  in  the  basis  for  the  tax  was  not  accepted  as 
entirely  satisfactory  by  the  officials.4  In  reality,  it 
amounted  to  a  discrimination  which  operated  very  unfa- 
vorably to  the  foreign  companies,  for  the  taxes  imposed 
proved  to  be  almost  prohibitory.  A  committee  was  ap- 
pointed to  investigate  the  taxaion  of  foreign  insurance 
companies  and  made  a  report  to  the  legislature  in  1847.5 
They  admitted,  with  some  reluctance,  that  foreign  cor- 
porations must  be  taxed  upon  a  different  basis  from  do- 
mestic, but  opposed  a  suggested  increase  in  the  rate. 
They  held  that  the  citizens  of  the  state  and  especially  of 
New  York  City  had  suffered  from  the  prohibitory  taxes 
which  had  been  placed  upon  foreign  insurance  companies. 
The  business  interests  of  the  community,  they  said,  re- 
quired the  encouragement  rather  than  exclusion  of  for- 

8  New  York  Statutes,  1837,  Chap.  30. 

4  The  report  of  the  Committee  on  Banks  and  Insurance  Com- 
panies, (Assembly  Documents,  1845,  No.  80)  pointed  out  that  this 
dual  classification  of  the  companies  caused  trouble  in  trying  to 
equalize  the  tax  paid  by  different  companies. 

•Assembly  Documents,  1847,  Vo.  8,  No.  251. 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  59 

eign  agencies,  at  least  until  such  time  as  the  state,  by 
wise  and  judicious  laws,  should  secure  the  establishment 
of  insurance  funds  sufficient  to  meet  the  exigencies  of 
ordinary  business.  They  even  questioned  the  constitution- 
ality of  the  law,  suggesting  that  it  ran  counter  to  the  fed- 
eral constitution.6  Because,  then,  of  the  doubtful  con- 
stitutionality of  the  law  and  the  wholesale  evasions  which 
were  practiced  under  it,  they  asked  for  its  repeal. 

While  early  legislation  was  thus  distinctly  hostile  to 
insurance  companies  incorporated  without  the  state,  the 
first  law  dealing  with  foreign  capital  in  general  was  of 
a  very  different  nature.  In  185 1  the  legislature  attempt- 
ed to  increase  the  amount  of  foreign  business  carried  on 
in  the  state.  A  law  passed  in  that  year7  provided  that 
products  from  any  state  of  the  United  States  which  were 
consigned  to  agents  in  New  York,  would  not  be  assessed 
to  the  agents.  Neither  were  the  agents- of  moneyed  cor- 
porations or  capitalists  to  be  taxed  for  any  moneys  in 
their  possession  or  under  their  control,  transmitted  to 
them  for  the  purpose  of  investment  or  otherwise.  Under 
such  an  act  there  is  little  doubt  that  there  was  discrimina- 
tion in  favor  of  the  foreign  organizations.  Not  only  was 
a  large  part  of  the  money  sent  here  free  from  tax  but 
practically  all  goods  manufactured  outside  the  state  and 
sent  here  for  sale  escaped  taxation.  The  money  in  the 
hands  of  citizens  and  corporations  of  the  state  no  doubt 
escaped  taxation  to  a  large  extent,  which  made  the  dis- 
crimination here  more  formal  than  real.     The  exemption 

6  Federal  Constitution,  Art.  4,  Sec.  21.  This  provides  that  the 
citizens  of  each  state  shall  be  entitled  to  all  privileges  and  immuni- 
ties of  the  citizens  in  the  several  states.  It  has  not  been  held,  how- 
ever, as  applicable  to  corporations.  A  corporation  is  an  artificial 
person  but  not  a  citizen.  Chief  Justice  Taney  pointed  out  (Bank 
of  Augusta  vs.  Earle)  that  a  corporation  could  have  no  legal  ex- 
istence outside  the  boundaries  of  the  state  by  which  it  was  created. 
It  existed  only  by  force  of  law  and  where  the  law  ceased  to  oper- 
ate, the  corporation  could  have  no  existence..  It  was  by  the  law 
of  comity  among  nations,  he  pointed  out,  that  a  foreign  corporation 
was  allowed  to  make  contracts  and  sue  in  the  courts  of  another 
state.  Neither  is  it  unlikely  that  a  state,  thru  the  exercise  of  its 
"police  power,"  could  discriminate  against  foreign  corporations  so 
long  as  it  was  considered  that  the  protection  and  welfare  of  its 
citizens  demanded  it. 

7  New  York  Statutes,  1851,  Chap.  176. 


60  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

of  goods  sent  to  the  state,  on  the  other  hand,  worked  as 
a  burden  upon  the  domestic  producer  since  the  home- 
made goods  could  not  easily  escape  taxation  yet  had  to 
compete  with  the  goods  which  were  sent  into  the  state. 
The  law  in  this  form,  however,  was  of  short  duration. 
In  1855  a  statute8  was  passed  which  provided  that  all  non- 
resident persons  and  associations  doing  business  in  the 
state,  as  merchants  or  bankers,  whether  as  principles  or 
as  agents,  should  be  assessed  and  taxed  on  all  sums  in- 
vested in  such  business  as  if  they  were  residents.  Al- 
though this  law  did  not  affect  money  sent  here  to  be  in- 
vested yet  it  eliminated  to  a  great  extent  the  other  forms 
of  discrimination  which  existed  under  the  previous 
law.  There  was  at  least  an  attempt  to  place  foreign  cor- 
porations upon  a  par  with  those  incorporated  under  the 
New  York  laws. 

It  soon  became  evident  that  both  the  general  law  and 
the  one  affecting  insurance  companies  needed  interpre- 
tation by  the  courts  at  some  points.  The  assessors  had 
put  upon  the  assessment  roll  the  amount  deposited  with 
the  Comptroller  as  a  perequisite  to  doing  business  in  the 
state.9  The  British  Commercial  Company  refused  to  pay 
the  tax  upon  this  and  carried  the  case  to  the  Supreme 
Court.10  which  held  that  securities  so  deposited  were  to 
be  considered  as  an  investment  and  were  liable  to  assess- 
ment and  taxation.11  It  was  also  necessary  that  the 
courts  make  some  determination  with  regard  to  the  situs 
of  property.  Any  personal  property  of  a  non-resident 
which  was  located  in  the  state  was  liable  to  taxation,  with 
only  such  exceptions  as  the  statute  law  had  made.12    This 

8  New  York  Statutes,  1855,  Chap.  37. 

9  Chapter  95,  New  York  Statutes,  1851,  required  a  deposit  of  one 
hundred  thousand  dollars  in  securities  with  the  comptroller. 

10  British  Commercial  Life  Insurance  Company  vs  Commsisioner 
of  Taxes,  28  Barbour,  318. 

"In  1853  (New  York  Statutes,  Chap.  463)  the  requirement  of  a 
deposit  with  the  comptroller  was  repealed,  and  the  court  held  (Peo- 
ple vs  New  England  Mutual  Life  Insurance  Company,  26  N.  Y., 
303)  that  even  though  some  corporations  did  not  immediately  with- 
draw the  securities,  they  were  no  longer  taxable  as  money  invested 
in  the  state. 

"  Hoyt  vs  Commissioner  of  Taxes,  23  N.  Y.,  224. 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  61 

was  to  apply  only  to  property  which  was  capable  of  hav- 
ing a  situs  and  which  really  had  one.  Property  in  transit 
through  the  state  for  instance,  was  not  taxable.  In  an- 
other case  13  it  was  held  that  goods  which  a  non-resident 
owner  had  sent  to  the  state  for  the  purpose  of  sale,  with- 
out reinvesting  the  proceeds,  were  not  liable  to  be  taxed. 
The  act,  it  held,  was  only  designed  to  reach  the  capital 
of  non-residents  which  was  employed  in  the  state  in  a 
continuous  business,  and  not  property  sent  merely  to  find 
a  market.  The  last  two  decisions  were  reversals  of  the 
opinions  of  the  lower  courts  and  increased  inequalities 
between  domestic  and  foreign  producers. 

By  a  law  of  186214  life  and  health  insurance  companies 
from  without  the  state  were  put  upon  the  same  basis  as 
other  insurance  companies,  especially  in  regard  to  the  two 
per  cent  tax  on  premiums.  In  1865  the  attitude  of  the 
legislature  towards  retaliatory  methods  was  shown. 
Some  states  it  seems,  had  been  discriminating  against 
New  York  insurance  companies.  A  law  15  was  passed 
aiming  directly  at  such  states.16  It  provided  that  if  any 
state  imposed  greater  penalties  upon  an  insurance  com- 
pany incorporated  under  New  York  laws  than  upon  its 
own  companies,  then  equal  penalties  should  be  imposed 
upon  companies  from  that  state  doing  business  in  New 
York.  The  state  of  Pennsylvania  required  a  payment  of 
three  per  cent  of  the  premiums  received  by  a  foreign  in- 

13  Parker  Mills  vs  Commissioner  of  Taxes,  23  N.  Y.,  242. 

14  New  York  Statutes,  1862,  Chap.  300. 

18  New  York  Statutes,  1865,  Chap.  694. 

"The  general  facts  with  regard  to  retaliatory  insurance  taxation 
are  well  known.  To  a  greater  or  less  degree  the  majority  of  the 
states  have  used  this  weapon  against  foreign  insurance  companies. 
In  1910  the  National  Tax  Association  adopted  a  resolution  to  the 
effect  that  a  uniform  method  of  taxing  premiums,  both  foreign  and 
domestic,  should  be  adopted  by  the  several  states.  Hon.  Geo.  Curtis, 
at  a  general  public  hearing  on  the  report  and  bill  of  the  Wisconsin 
Tax  Commission  relating  to  the  taxation  of  life  insurance  companies 
reviewed  the  facts  and  effects  of  "retaliation"  taxation  upon  insur- 
ance companies.  He  thinks  such  laws  have  often  served  a  just  pur- 
pose, and  if  their  existence  and  enforcement  would  tend  to  secure 
the  needed  uniformity,  it  would  be  an  additional  reason  for  their 
retention.  If  the  laws  should  become  uniform,  then  the  retaliatory 
effect  would  become  inoperative. 


62  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

surance  company.  Because  of  this  the  court  held  17  it 
justifiable  that  New  York  should  demand  the  same  per- 
centage of  premium  from  a  company  incorporated  in 
Pennsylvania. 

The  scheme  of  taxing  foreign  corporations  was,  how- 
ever, far  from  satisfactory.  The  court  had  decided18 
that  the  part  of  the  law  of  1851  which  exempted  from  tax 
the  capital  in  the  hands  of  agents  for  the  purpose  of  in- 
vestment was  not  repealed  by  the  act  of  1855.  A  large 
amount  of  capital  which  practically  escaped  taxation  con- 
tinued to  come  into  the  state. 

The  practice  which  foreign  banking  houses  followed 
is  a  good  illustration.  They  would  have  a  permanent 
agency  established  in  the  state  to  which  they  would  send 
money  to  be  employed  in  temporary  loans.  Since  they 
were  subject  at  all  times  to  the  control  of  the  home  office, 
such  funds  were  held  to  be  exempt  from  taxation.  A  large 
number  of  banking  houses  of  other  states  and  Canada 
established  such  agencies.  They  came  and  received  the 
protection  of  the  laws,  courts,  and  police,  yet  paid  no 
taxes.  This  was  a  discrimination  in  favor  of  foreign 
capital  since  the  domestic  institutions  of  the  same  kind 
were  taxed,  at  least  upon  their  capital  which,  in  part,  was 
the  basis  of  their  ability  to  extend  loans.  In  addition 
to  the  local  burdens,  national  banks  had  to  bear  the  tax 
imposed  by  the  federal  government.  Because  of  the  tax, 
the  profits  which  the  foreign  representatives  received  were 
greater  than  the  domestic  houses  realized  upon  similarly 
employed  capital.  Year  after  year  the  state  assessors 
and  comptrollers  pointed  out  the  evils  and  asked  for  re- 
form. They  did  not  ask  for  legislation  which  would 
make  it  difficult  for  foreign  capital  to  come  to  the  state, 
but  for  some  measure  which  would  put  all  upon  an  equal 
footing.  "The  owners  of  foreign  capital,"  said  the  as- 
sessors, "would  have  no  cause  for  complaint  if  taxed  in 
the  same  manner  as  citizens,  but  citizens  have  a  just  cause 

"People  vs  Fire  Association,  92  N.  Y.,  311.     Affirmed,  119  U.  S., 
110. 

u  Bank  of  Montreal  vs  Commissioner  of  Taxes,  59  N.  Y.,  40. 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  63 

for  complaint  when  the  laws  favor  foreign  capital.19 
The  noted  tax  commission  which  reported  in  1871  20 
recommended  that  foreign  insurance  companies  be  assess- 
ed and  taxed  under  the  laws  which  applied  to  domestic 
companies,  and  that  thereafter  the  same  statute  should 
apply  to  both. 

To  illustrate  the  way  in  which  the  law  as  interpreted 
worked,  we  shall  notice  the  case  of  the  Manchester  Plate 
Glass  Company.  This  was  an  English  concern  which 
maintained  a  store  in  New  York  City.  They  were  assess- 
ed $150,000  upon  goods  not  contained  in  the  original 
packages  in  which  they  were  imported.  The  assessment 
was  not  allowed  to  stand  because  the  proceeds  from  the 
sales  were  not  invested  here  but  were  remitted  to  the  for- 
eign house.  In  reality,  the  way  in  which  the  law  was  en- 
forced and  interpreted  placed  no  tax  upon  the  foreign 
banking  business  carried  on  in  the  state,  while  domestic 
capital  used  in  the  same  business  was  taxed. 

The  products  of  foreign  manufacturers,  under  certain 
conditions  easily  complied  with,  were  exempt  from  tax- 
ation while  the  domestic  manufacturers  of  similar  articles 
were  taxed.  The  Commissioner  of  Taxes  and  Assess- 
ments for  New  York  City,  in  his  report  for  187721 
says  that  if  the  purpose  were  to  specifically  protect  for- 
eign capital  and  foreign  industres  at  the  expense  of  home 
capital  and  industries  no  more  effective  law  would  be 
needed.  He  asked  for  some  equalizing  remedy — either 
to  tax  foreign  industry  or  remove  the  burden  from  home 
industry. 

Finally,  in  1880,  the  legislature  responded  to  these  de- 
mands and  passed  two  laws,  one  relating  to  the  taxation 
of  foreign  bankers22  and  the  other  to  fire  and  marine  in- 
surance companies.2*    The  first  of  these  stated  that  every 

"Annual  report  of  the  State  Assessors,  1880,  Senate  Documents, 
1880,  Vo.  1,  No.  26. 

"  Assembly  Documents,  1871,  Vol.  3,  No.  265.    See  note.  p.  16. 

21  Annual  Report,  Commissioner  of  Taxes  and  Assessments,  New 
York  City,  1877. 

a  New  York  Statutes,  1880,  Chap.  596. 

28  New  York  Statutes,  1880,  Chap.  542. 


64  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

organization,  created  under  laws  other  than  those  of  New 
York,  and  in  any  manner  engaged  in  banking  business 
in  the  state,  was  to  pay  annually  to  the  state  comptroller 
a  tax  of  one  half  of  one  per  cent  on  the  average  of  all 
sums  of  money  used  in  the  state  during  the  year.  The 
organizations  were  required  to  make  returns  which  would 
give  the  proper  data  upon  which  to  base  the  assessment. 
As  a  penalty  for  any  failure  to  make  the  required  returns, 
the  law  provided  that  ten  per  cent  of  the  amount  of  the 
tax  should  be  added.  With  regard  to  fire  and  marine 
insurance  companies,  it  was  provided  that  such  organiza- 
tions, created  without  the  state,  should  pay  a  semi-annual 
tax  of  eight-tenths  of  one  per  cent  on  the  gross  premiums 
which  they  received  from  business  transacted  within  the 
state  during  the  previous  six  months.  They  were  to 
make  semi-annual  reports  which  would  show  the  amount 
of  the  premiums  they  had  received.  Lands  and  real  estate 
were  to  be  taxed  where  situated,  but  capital  stock  and 
personal  property  were  to  be  exempt.  We  note  here  the 
introduction  of  the  semi-annual  payment  of  the  tax,  a 
feature  which  is  in  use  in  many  of  the  western  states  with 
all  taxes,  but  which  we  do  not  generally  find  in  New 
York.  In  these  two  laws  opposite  tendencies  are  quite 
marked;  in  the  case  of  banks,  a  tax  was  imposed  which 
did  not  before  exist  while  in  the  case  of  fire  and  marine 
insurance  companies  the  tax  was  reduced.  Foreign  cor- 
porations, other  than  those  just  discussed,  were  affected 
by  the  general  corporation  tax  legislation  of  1880  and 
1881.  By  this,  the  capital  of  foreign  corporations  as  well 
as  that  of  domestic  corporations  was  made  subject  to  the 
annual  franchise  tax.  The  court  held,24  too,  that  the 
basis  of  the  annual  franchise  tax  for  foreign  corporations 
was  the  entire  capital  and  not  the  portion  of  it  which  was 
employed  within  the  state.  Such  a  principle  was  unques- 
tionably unjust,  but  such  was  the  law  until  1885.  In  that 
year  the  legislature  limited  the  franchise  tax  to  the 
amount    of  capital  employed  in  the  state. 

This  legislation  did  not  receive  the  approbation  of  the 
foreign  corporations.     Shortly  after  the  passage  of  the 

*  People  vs  Horn  Silver  Mining  Company,  105  N.  Y.,  76. 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  65 

law  representatives  of  these  organizations  met  in  the  Met- 
ropolitan Hotel  to  take  some  action  of  protest  against 
the  tax  levied  upon  their  capital  stock.  It  was  claimed 
that  the  law  under  which  they  were  required  to  make 
statements  to  the  comptroller  in  regard  to  their  business 
was  a  discrimination  against  them.  The  tax  was  collect- 
ed directly  by  the  comptroller  and  was  based  entirely  up- 
on the  success  of  the  business.  The  reports  which  were  re- 
quired worked  a  hardship  upon  them  since  it  threw  their 
business  open  to  the  inspection  of  their  competitors.  Such 
were  some  of  the  grievances  and  the  meeting  resulted  in 
the  unanimous  adoption  of  a  resolution  instructing  a  com- 
mittee to  prepare  petitions  to  the  legislature  asking  for 
the  repeal  of  the  laws.  Every  corporation  interested  was 
assessed  one-fourth  mill  on  every  dollar  of  their  capital 
stock  to  pay  the  expenses  of  such  suits  as  might  be  insti- 
tuted by  the  comptroller  to  enforce  the  payment  of  taxes 
under  the  law.  The  results  of  this  meeting  show  that 
the  foreign  corporations  were  not  going  to  surrender  the 
privileges  which  they  had  enjoyed  without  a  fight,  and 
subsequent  litigation  shows  that  they  made  use  of  the  one- 
fourth  mill  assessment. 

As  might  be  expected  the  new  legislation  caused  a 
large  amount  of  litigation.  A  few  cases  will  suffice  to 
illustrate  the  nature  of  the  difficulties  left  for  the  courts 
to  decide.  One  of  the  troublesome  problems  was  to  de- 
termine when  a  corporation  was  doing  business  in  the 
state.  The  American  Bell  Telephone  Company  had  been 
carrying  on  a  business  in  the  state  through  local  compan- 
ies acting  as  its  agents.  It  had  no  officers  but  did  its  bus- 
iness entirely  through  agreements  made  with  local  com- 
panies. Because  of  this  arrangement,  it  claimed  that  it 
was  not  doing  business  here  under  the  meaning  of  the 
law.  The  lower  court  held25  that  in  order  to  render  any 
company  taxable,  no  proportionate  amount  of  its  business 
was  required  to  be  transacted  in  the  state.  If  any  of  its 
business  had  been  carried  on  in  any  way,  it  was  liable  to 
25  People  vs  American  Bell  Telephone  Company,  50  Hun,  114. 


66  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

the  tax.  The  Court  of  Appeals26  refused  to  take  this 
view  and  held  that  where  the  foreign  company  had  leased 
and  licensed  the  use  of  telephones  in  the  state  under  con- 
tract between  the  parties,  it  was  not  carrying  on  business 
under  the  meaning  of  the  act.  The  business  which  was 
carried  on,  it  held,  was  being  carried  on  by  the  local  com- 
panies and  they  were  subject  to  the  tax.  In  another 
case27  it  was  held  that  a  company  which  was  organized 
under  the  laws  of  another  state  and  which  had  property 
in  New  York,  could  not  claim  exemption  from  taxation 
on  account  of  the  laws  of  its  own  state. 

The  question  of  interference  with  interstate  commerce 
was  one  which  very  frequently  arose.  Of  the  multitude 
of  cases  which  came  before  the  courts  we  shall  note  but 
two  typical  ones.  A  manufacturing  company  which  did 
a  part  of  its  business  in  the  state  claimed  that  the  regula- 
tion of  commerce  between  states  was  the  sole  prerogative 
of  the  federal  government,  and  that  the  taxation  violat- 
ed this  principle.  The  Court  of  Appeals  held28  otherwise 
and  ruled  that  there  is  no  limitation  upon  the  power  of  a 
state  to  exclude  a  foreign  company  from  doing  business 
within  its  limits,  or  to  exact  conditions  for  such  privi- 
lege, save  when  the  corporation  is  in  the  employ  of  the 
federal  government  or  where  its  business  is  strictly  com- 
merce. The  fact  that  legislation  upon  the  subject  might 
indirectly  affect  commerce  did  not  render  it  unconstitu- 
tional. Property  engaged  in  foreign  or  interstate  com- 
merce, might  be  taxed  the  same  as  domestic  property  but 
no  more. 

The  other  case  which  we  shall  notice  was  one  involving 
the  Pennsylvania  Railroad.  The  line  of  the  company  ex- 
tended into  other  states  but  not  into  New  York.  It  oper- 
ated a  ferry  in  connection  with  its  road  across  the  Hudson 

"People  vs  American  Bell  Telephone  Company,  117  N.  Y.,  241.  In 
New  York  the  Court  of  Appeals  is  the  highest  court  and  corres- 
ponds to  the  Supreme  Court  of  many  states. 

"People  vs  Coleman,  135  N.  Y.,  231.  The  court  here  said  that  it 
seemed  the  legislature  might  constitutionally  impose  double  tax- 
ation but  its  purpose  so  to  do  may  never  be  inferred,  but  must 
plainly  appear. 

"Southern  Cotton  Oil  Company  vs  Wemple,  131  N.  Y.,  64. 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  67 

to  the  city  of  New  York  where  it  had  terminal  facilities. 
It  used  these  facilities  for  receiving  and  delivering  freight 
and  passengers.  It  collected  money  there  for  tickets  and 
maintained  a  large  force  of  workmen.  This  terminal 
was  assessed  and  taxed;  then  the  company  carried  the 
case  to  court  on  the  ground  that  the  state  was  interfering 
with  interstate  commerce.  The  court  of  Appeals  re- 
fused29 to  allow  the  tax  to  stand  since  the  business  engag- 
ed in  was  exclusively  that  of  interstate  commerce.  A  for- 
eign corporation  which  was  engaged  both  in  the  business  of 
state  and  interstate  transportation  in  the  state  was,  how- 
ever, subject  to  taxation  in  common  with  domestic  corpor- 
ations. From  these  decisions  and  other  similar  ones,  it 
seems  the  court  attempted  to  establish  the  principle  that 
a  state  can  levy  a  tax  upon  property  engaged  in  interstate 
commerce  so  long  as  their  is  no  hostile  discrimination 
against  such  property.  It  would  seem,  however,  that 
property  which  belongs  exclusively  to  interstate  com- 
merce cannot  be  taxed  by  the  state. 

The  system  thus  far  devised  did  not  prove  satisfac- 
tory. The  corporations  relied  more  upon  evasion  than 
upon  the  courts  in  their  attempts  to  escape  the  tax.  Banks 
made  such  excuses  as,  even  though  they  furnished  the 
money,  they  did  no  business — that  it  was  carried  on  by 
their  agent.  In  other  cases  they  claimed  that  they  used 
no  money.  Some  refused  because  they  were  neither  cor- 
porations,companies  nor  joint  stock  associations  "creat- 
ed" under  laws  other  than  those  of  New  York,  but  were 
formed  under  "common  law"  in  their  native  state.  Others 
refused  to  comply  with  the  law  on  the  ground  that  they 
were  either  partnerships  or  individuals.  These  and  other 
excuses  which  the  minds  of  the  legal  advisors  could  con- 
coct were  given,  instead  of  making  the  reports  and  paying 
the  tax.  The  law  proved  to  be  practically  a  dead  letter 
since  in  1889  only  five  banks  paid  any  tax.  A  large  num- 
ber were  reaping  profits  from  the  state,  yet  were  bearing 
no  share  of  the  public  burdens.  Each  successive  report 
of  the  comptroller  pointed  out  the  evasions  and  difficulties 
and  asked  for  modification,  but  it  was  not  until  1894  that 

29  People  vs  Wemple,  138  N.  Y.,  1. 


68  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

the  legislature  attempted  to  give  relief. 

In  that  year  a  law  was  passed30  which  purposed  to  deal 
with  the  difficulties  in  regard  to  the  foreign  banks.  It 
provided  that  every  foreign  banker  doing  a  business  in 
the  state  was  liable  for  the  payment  of  an  annual  tax  of 
one-half  of  one  per  cent  on  the  amount  of  business  done 
in  the  state  during  the  year  ending  December  thirty-first. 
The  amount  of  business  which  was  carried  on  was  to  be 
computed  by  finding  the  daily  average  for  each  month, 
of  the  moneys  received,  used,  or  employed  in  connection 
with  the  business.  The  aggregate  of  such  monthly  aver- 
ages was  to  be  divided  by  the  number  of  months  in  the 
year.  Each  bank  was  to  make  a  report  as  to  the  amount 
of  business  and  tax  due  to  the  state  on  or  before  Febru- 
ary first.  In  the  case  of  failure  to  do  this,  or  if  the  report 
was  not  satisfactory,  the  comptroller  was  authorized  to 
examine  the  books  and  records  of  the  bank  for  the  pur- 
pose of  determining  the  tax.  A  penalty  of  ten  per  cent 
of  the  tax  was  imposed  when  there  was  a  failure  to  make 
the  report.  It  further  required  the  institutions  to  keep 
the  financial  accounts  of  the  business  so  that  they  could 
be  examined  by  the  comptroller  at  any  time.  All  taxes 
and  penalties  ,in  cases  of  failure  to  pay,  were  to  be  recov- 
ered by  action  brought  by  the  Attorney-General.  Here 
we  see  that  the  determination  of  the  tax  was  not  left  en- 
tirely to  the  banks,  but  power  is  given  to  state  officials 
to  investigate  and  verify  reports.  This  is  perhaps  the 
most  marked  advance  over  previous  legislation. 

In  1895  a  license  tax — corresponding  to  the  domestic 
organization  tax — of  one  eighth  of  one  per  cent  was  plac- 
ed upon  all  foreign  corporations  (except  banks  and  in- 
surance companies)  doing  business  in  the  state.31  The 
amount  of  capital  employed  during  the  first  year  was  to 
be  the  basis  of  the  tax.     In  T89633  the  law  in  regard  to 

"New  York  Statutes,  1894,  Chap.  196. 

"  New  York  Statutes,  1895,  Chap.  240. 

"  New  York  Statutes,  1896,  Chap.  908.  The  difficulty  had  still  re- 
mained of  bankers  claiming  they  did  not  come  under  the  law.  This 
law  explicitly  pointed  out  that  the  term  foreign  banker  was  to  in- 
clude   (1)    every  foreign  corporation  doing  a  banking  business  in 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  69 

foreign  bankers  was  so  amended  as  to  set  forth  in  detail 
just  who  came  under  the  provisions  of  the  act.  By  an  act 
passed  in  189234  the  capital  of  any  insurance  company, 
incorporated  under  the  laws  of  any  state  or  country  out- 
side of  New  York,  to  the  extent  employed  in  business  in 
the  state  was  to  be  subject  to  taxation  the  same  as  the 
capital  of  a  like  domestic  insurance  company.  Such 
taxation  was  to  take  place  where  its  principal  office  was 
located.  By  this  same  law  all  foreign  insurance  compan- 
ies,— life,  health,  marine — doing  business  in  the  state, 
were  to  pay  two  per  cent  of  all  premiums  received. 

The  license  fee  of  one  eighth  of  one  per  cent  brought 
results  which  were  immediately  noticeable.  The  law,  in 
reality,  did  not  go  into  effect  until  the  first  of  December, 
yet  the  tax  received  for  the  month  was  over  $1300.  Four 
companies  which  had  been  organized  without  the  state, 
yet  did  practically  all  the  business  here,  immediately  re- 
organized under  New  York  laws.  Not  only  did  the  law 
produce  a  license  tax,  but  it  greatly  increased  the  organi- 
zation tax  since  the  inducement  of  a  low  organization  tax 
which  other  states  held  out  was  no  longer  a  gain  to  a 
company  which  had  most  of  its  business  in  New  York. 
The  total  organization  tax  received  by  the.  state  in  1895 
was  $258,464  while  in  1896  it  amounted  to  $503,951. 
The  Comptroller,  in  his  reports  for  1895  and  189635  was 
very  enthusiastic  concerning  the  good  effects  of  the 
license  fee.  In  the  second  of  these  reports  he  pointed  out 
that  in  addition  to  the  increase  from  licenses,  the  state 
had  received  a  large  increase  of  the  capital  stock  tax. 
This  was  because  many  corporations,  which  would  other- 
wise have  escaped  notice,  were  brought  to 'the  attention 
of  the  department  through  the  payment  of  the  license. 

These  modifications  in  the  laws  caused  an  increased 

the  state  except  national  banks;  (2)  every  unincorporated  associa- 
tion of  two  or  more  individuals  organized  under  the  laws  of  another 
state  or  country;  (3)  every  association  of  two  or  more  individuals, 
if  the  members  owning  more  than  half  of  the  interest  or  entitled 
to  more  than  half  of  the  profits  were  non-residents;  (4)  every  non- 
resident doing  a  banking  business  in  his  own  name. 

84  New  York  Statutes,  1892,  Chap.  690. 

w  Annual  Reports,  New  York  State  Comptroller,  1895  and  1896. 


70  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

amount  of  litigation.  A  few  cases  will  serve  to  illustrate 
the  nature  of  the  questions  which  arose.  Some  domestic 
corporations  sought  to  evade  taxation  by  consigning  their 
property  to  agents.  The  lower  courts  held  that  such 
property  was  not  exempt  but  was  taxable  to  the 
agent.  The  Court  of  Appeals  held  that,  such  property 
was  taxable,  but  that  it  should  be  assessed  to  the 
corporation  at  the  place  where  it  was  located.36  Difficul- 
ties arose  in  placing  a  value  upon  the  capital  of  foreign 
corporations  for  the  purpose  of  taxation.  In  such  evalua- 
tions the  court  held37  that  the  par  value  of  the  stock  was 
to  be  used  as  the  proper  basis. 

The  questions  as  to  what  effect  the  good  will,  debts 
and  surplus  of  foreign  corporations  had  upon  their  valu- 
ation were  left  for  the  courts  to  decide.  Where  the  good 
will  enjoyed  by  one  firm  was  transferred  to  a  corpora- 
tion organized  to  continue  and  take  over  the  business, 
such  good  will  was  an  asset  and  was  to  be  considered  in 
determining  the  amount  of  capital  employed  in  the  state. 
In  fixing  the  amount  of  the  capital  the  same  proportion 
of  the  value  of  the  entire  good  will  was  to  be  taken  as  the 
amount  of  the  tangible  capital  employed  by  the  corpor- 
ation in  the  state  bore  to  the  entire  amount  of  tangible 
capital38  Copyrights  granted  by  the  government,  how- 
ever, were  held  to  be  without  the  taxing  power  of  the 
state.39  Some  companies  had  purchased  property  in  the 
state  and  had  not  made  full  cash  payments  for  it.  When 
such  purchases  were  made,  so  held  the  court.40  and  the 
company  paid  cash  for  a  part  and  promised  to  pay  the 
balance  in  the  future,  or  paid  no  cash  but  promised  to 
pay  in  the  future,  the  amount  still  due  upon  the  property 
was  to  be  deducted  from  the  value  of  the  property  in  or- 
der to  ascertain  the  "sum  invested"  in  the  state  upon 
which  the  law  held  them  taxable.  In  case  all  the  corpor- 
ate property  and  business  of  a  foreign  company  were  in 

**  Boardman  vs  Supervisors,  22  Hun,  231 ;  85  N.  Y.,  359. 
v  Elliott-Fisher  Company  vs  Lohmer,  206  N.  Y.,  10. 
u  Koecht  and  Company  vs  Morgan,  183  N.  Y.,  359. 
"Johnson  Company  vs  Roberts,  159  N.  Y.,  70. 
**  People  vs  Barker,  147  N.  Y.,  31. 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  7\ 

the  state,  the  corporation  was  entitled  to  have  the  amounts 
of  its  debts  deducted  from  the  amount  of  capital  employ- 
ed in  the  state.42 

The  question  of  dealing  with  the  surplus  arose  in  sev- 
eral cases.  A  West  Virginia  advertising  company  was 
incorporated  for  $5000  but  was  employing  $40,000  in 
New  York.  The  comptroller  fixed  the  basis  of  the  tax  at 
$40,000.  The  court  ruled  that  no  matter  how  great  the 
aggregate  property  of  a  corporation  was,  the  "capital 
stock" — the  basis  of  the  tax — could  not  exceed  the 
amount  authorized  by  the  charter.  The  company  might 
employ  surplus  and  not  increase  capital  stock,  and  the 
surplus  not  be  subject  to  taxation.43  At  another  time  the 
court  held  that  surplus  earnings  of  a  foreign  company, 
carrying  on  a  portion  of  its  business  in  the  state,  which 
were  invested  in  real  estate,  could  not  be  taxed.44 

The  attitude  of  the  court  in  the  McLean  case  has  made 
it  difficult  to  collect  taxes  from  foreign  companies.  No 
action  it  held,  could  be  taken  against  the  person  so  there 
is  left  ony  the  recourse  of  proceeding  against  the  property. 
That  such  has  been  ineffective  is  shown  by  the  fact  that 
from  1 90 1  to  191 3  the  annual  tax  collected  for  non-resi- 
dents in  New  York  city  decreased  nearly  fifty  per  cent.45 

These  laws,  as  thus  interpreted,  constitute  essentially 
the  present  system  of  taxing  foreign  corporations.  We 
have  the  general  law  covering  all  classes,  and  special  leg- 
islation in  the  case  of  banks  and  insurance  companies. 
A  little  consideration  of  the  above  interpretations  will 
convince  one  that  they  provide  the  way  for  the  escape  of 
much  capital  which  the  law  intended  to  tax.  That  a  large 
amount  of  evasion  was  being  practiced  was  pointed  out  by 
the  Comptroller  in  his  report  for  1895.46  He  had  been 
convinced  by  a  little  tentative  work  that  several  thousand 
taxable  foreign  corporations  employing  a  whole  or  a  por- 
tion of  their  capital  in  the  state,  were  not  yet  upon  the 

43  Journeay  vs  Roberts,  27  Supreme  Court,  App.  Div.,  1. 

43  Advertising  Company  vs  Roberts,  151  N.  Y.,  621. 

**  People  vs  Wemple,  150  N.  Y.,  46. 

"City  of  New  York  vs  McLean,  170  N.  Y.,  374. 

*  Annual  Report  of  New  York  State  Comptroller,  1895. 


12  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

comptroller's  books.  Many  had  failed  to  secure  a  certifi- 
cate authorizing  them  to  do  business  in  the  state,  and  such 
could  only  be  discovered  by  personal  examination.  The 
license  tax  to  some  extent  alleviated  the  difficulty  but  by 
no  means  eliminated  it. 

The  exemption  of  the  surplus  paved  the  way  for  as 
much  evasion  of  the  tax  as  any  other  feature  of  the  sys- 
tem. Corporations  are  not  slow  to  claim  that  the  money 
employed  in  the  state  is  surplus  and  that  the  real  capital 
is  invested  outside  of  the  state.  They  claim  that  they 
are  exempt  from  taxation  because  they  have  more  surplus 
than  the  amount  used  in  New  York.  A  New  York  citi- 
zen might  incorporate  in  another  state  for  $5000  and  by 
issuing  bonds  or  establishing  a  so-called  surplus,  practic- 
ally escape  taxation.  It  was  an  incentive  to  undercapi- 
talization for  by  such  organization  a  surplus  was  automat- 
ically created.  Numerous  suggestions  for  reform  were 
made. 

In  his  report  for  1898,47  after  pointing  out  the  condi- 
tions, the  State  Comptroller  made  the  suggestion  that 
they  should  cease  trying  to  tax  the  capital  stock  created 
by  the  laws  of  another  state.  He  considered  it  would  be 
better  to  assess  an  annual  tax  upon  the  right  to  do  busi- 
ness in  the  state.  He  suggested,  as  the  measure  of  this 
taxation,  such  part  of  the  authorized  capital  stock  of  the 
foreign  corporation  as  its  tangible  assets  in  New  York 
state  bore  to  its  entire  tangible  assets.  He  even  went  so 
far  as  to  incorporate  these  recommendations  in  a  bill 
which  he  had  introduced  into  both  houses  of  the  legis- 
lature. It  was  aimed  at  the  practice  of  corporations  go- 
ing to  another  state  and  incorporating  for  perhaps  several 
million  dollars  while  their  entire  business  in  New  York 
was  carried  on  with  only  a  few  thousand  dollars  in  capital 
stock.  The  bill  did  no  pass,  and  the  Governors'  mes- 
sages's48  and  comptroller's  reports  continued  to  point  out 

*' Annual  Report  New  York  State  Comptroller,  1898,  Assembly 
Documents,  1898,  Vol.  1,  No.  3. 

41  Governor  Odell,  in  his  message  to  the  legislature  in  1902  (Sen- 
ate Documents,  1902,  Vol.  1,  No.  2.)  pointed  out  that  certain  com- 
panies had  taken  the  amount  of  their  corporation  holdings  in  the 
state  and  incorporated  under  the  same  name  and  with  the  same 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  73 

the  inequalities  and  ask  for  reform.  Not  only  were  the 
state  officials  dissatisfied,  but  the  special  tax  commission 
which  reported  in  190049  decried  the  conditions  and  asked 
for  reform.  In  190650  the  legislature  passed  a  bill  which 
was  practically  the  suggestion  made  by  the  comptroller  in 
1898.  This  remedied  the  evil  of  having  a  large  capitaliza- 
ton  without  the  state  and  only  a  small  amount  employed 
in  New  York,  even  though  a  large  amount  of  the  busi- 
ness were  done  here.  It  did  not,  however,  remedy  the 
evil  of  exempting  the  invested  surplus  from  taxation.  A 
company  with  a  small  capitalization  might  still  have 
a  large  amount  of  assests,  and  yet  escape  with  a  compar- 
atively light  tax. 

The  law51  which  exempts  from  taxation  such  compan- 
ies as  are  employing  at  least  forty  per  cent  of  their  capi- 
tal in  manufacturing  has  been  taken  advantage  of  by  for- 
eign corporations.  They  organize  small  companies  under 
New  York  laws,  such  organizations  often  having  the  same 
name  as  the  foreign  corporation  with  the  words  "of  New 
York"  added.  The  foreign  company  owns  all  of  the  share 
stock  of  the  domestic  company,  and  it  frequently  happens 
that  the.  domestic  company  pays  no  dividends.  The  net 
returns  find  their  way  back  to  the  parent  foreign  corpora- 
tion. The  provision  which  exempts  the  goods  of  a  for- 
eign corporation  from  tax  if  the  proceeds  from  the  sale 
are  transmitted  to  the  home  office,  no  doubt  often  works 
as  a  discrimination  against  domestic  producers.  A  for- 
eign company  can  fill  a  warehouse  with  goods  and  keep 
them  as  long  as  it  desires  without  paying  a  tax,  while  a 

officers  as  designated  in  the  incorporation  in  other  states.  This  al- 
lowed them  to  evade  taxes  for  which  they  would  otherwise  be  lia- 
ble. He  suggested  that  no  corporation  be  allowed  to  form  with  the 
same  name  as  that  borne  by  a  corporation  of  another  state.  Gover- 
nor Higgins  (Senate  Documents,  1906,  Vol.  1,  No.  1)  contended 
that  a  corporation  organized  eleswhere  to  do  business  in  the  state 
and  which  was  a  foreign  corporation  in  name  only,  thereby  obtain- 
ed an  unfair  advantage  over  the  legitimate  domestic  corporation 
which  incorporated  under  New  York  laws. 

49  Report  of   Special  Tax   Commission,   Senate  Documents,   1900, 
Vol.  1.  No.  7. 

M  New  York  Statutes,  1906,  Chap.  474. 

"New  York  Statutes,  1901,  Chap.  558. 


74  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

domestic  company  under  similar  conditions  would  be  tax- 
ed. By  a  law  passed  in  190052  every  foreign  banker  is 
required  to  pay  a  tax  of  five  per  cent  on  the  amount  of 
interest  or  compensation  of  any  kind  earned  and  collected 
by  him  on  money  loaned,  used,  or  employed  in  the  state. 

In  dealing  with  foreign  corporations,  two  conflicting 
policies  have  been  followed.  One  has  been  that  foreign 
capital  should  be  attracted  in  order  to  develop  large  indus- 
try within  the  state.  The  other  tendency  has  been  to  pro- 
tect domestic  capital.  While  each  of  these  proposals  has 
its  advocates,  it  would  seem  better  not  to  discriminate  be- 
tween the  two  classes  of  capital,  but  to  treat  all  capital 
within  the  state  under  the  same  conditions,  on  an  equal 
basis.  Only  by  doing  this  can  it  be  insured  so  far  as  tax- 
ation is  concerned,  at  least,  that  competition  will  be  up- 
on an  equal  basis.  Whatever  be  the  method  in  use,  then, 
for  taxing  the  domestic  corporations,  the  same  should 
be  applied  to  the  foreign.  Much  has  been  said  about  im- 
posing greater  burdens  upon  foreign  corporations  than 
upon  foreign  individuals  doing  business  in  the  state.  The 
individuals  pay  a  tax  upon  the  property  but  do  not  have 
to  pay  the  license  and  franchise  taxes.  But  this  question 
no  more  applies  to  foreign  corporations  than  to  corpora- 
tions in  general.  If  it  be  decided  that  the  corporate  form 
gives  advantages  which  enable  it  to  pay  higher  taxes 
than  the  individual,  then  the  foreign  corporation  should 
bear  them  as  well  as  the  domestic. 

If  we  had  a  uniform  system  of  taxing  corporations  for 
all  the  states,  then  our  problems  of  driving  out  or  at- 
tracting capital  would  be  minimized.  But  since  we  have 
such  varied  systems,  the  states  should  endeavor  to  treat  all 
concerns  doing  business  within  their  borders  upon  an 
equal  basis.  There  would  be  at  least  some  tendency  to 
uniformity,  for  the  states  which  imposed  harsh  burdens 
upon  their  corporations  would  not  only  keep  foreign  capi- 
tal from  coming  to  them,  but  would  tend  to  force  domes- 
tic capital  outside  their  borders.  As  long  as  New  York 
uses  the  franchise  tax  upon  capital  stock  as  the  basis  for 
taxing  a  large  part  of  its  corporations,  this  also  should 

M  New  York  Statutes,  1900,  Chap.  500 


THE  TAXATION  OF  FOREIGN  CORPORATIONS  75 

be  used  in  the  case  of  the  foreign  corporations.  We  have 
seen  that  the  amount  of  capital  stock  in  the  state  was  con- 
sidered as  that  proportion  of  the  whole  capital  stock  which 
the  assets  in  the  state  bore  to  the  total  assets.  We  also 
saw  that  this  was  largely  evaded  by  a  small  capitalization 
and  the  use  of  surplus  in  the  state,  which  the  courts  have 
held  could  not  be  taxed.  Such  evasions  should  be  mini- 
mized. One  way  in  which  this  could  be  accomplished 
would  be  to  change  the  basis  of  comparison.  Perhaps  as 
fair  a  way  as  any  under  the  existing  circumstances  would 
be  to  consider  both  the  capital  stock  and  surplus  as  "capi- 
tal stock"  for  the  basis  of  the  tax.  And  so  long  as  classi- 
fications of  capital  stock  are  made  according  to  the 
amount  of  dividends  paid,  more  or  less  confusion  will 
result.  We  have  pointed  out  in  another  chapter  the  difi- 
culties  which  this  provision  occasions.  Under  the  present 
scheme  of  apportionment,  equality  is  not  always  obtained 
because  the  dividends  accrue  only  partially  from  business 
done  within  the  state.  The  amount  of  business  which  a 
foreign  company  carries  on  within  the  state  bears  no 
constant  ratio  to  the  amount  of  its  assets  found  here. 
Hence  taxation  which  takes  for  its  basis  the  capital  stock, 
classified  according  to  the  amount  of  dividends  paid,  and 
in  proportion  to  the  amount  of  assets  found  within  the 
state,  is  not  fair. 

Then,  too,  the  provision  exempting  goods  from  taxa- 
tion which  are  sent  here  to  agents  should  be  modified. 
As  the  home  producer  is  made  to  pay  tax  upon  the  goods 
he  has  in  stock,  it  is  unfair  discrimination  to  exempt  the 
foreign  goods.  The  assessors  should  be  allowed  to  as- 
sess such  consignments  on  the  same  basis  as  they  assess 
other  goods. 

Since  for  the  present  at  least,  we  are  to  use  the  capital 
stock  as  the  basis  of  the  tax,  the  question  arises  as  to  the 
best  way  of  determining  the  amount  "employed"  in  the 
state.  Can  we  find  a  more  equitable  basis  than  that  of 
assets?  A  little  investigation  convinces  us  that  the  entire 
assets  of  some  foreign  corporations  consist  of  an  office 
in  New  York  City.  Yet  it  by  no  means  follows  that  this 
represents  the  importance  of  New  York  to  the  company. 


76  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

For  psychological,  economic,  or  geographic  reasons  the 
entire  business  of  the  company  may  be  carried  on  through 
this  office.  As  much  of  it  may  be  with  New  York  citi- 
zens or  foreign  countries  as  if  it  were  a  domestic  company. 
Because  such  company  has  no  assets  in  the  state  should 
it  escape  taxation  ?  We  think  not.  Perhaps  it  would  not 
be  far  amiss  to  take,  instead  of  the  assets,  the  amount  of 
business  transacted  within  the  state  as  the  proper  propor- 
tion of  the  company's  capital  to  be  taxed.  Surely  the 
amount  of  business  represents  more  the  contribution  of 
New  York  to  their  ability  to  pay  taxes  than  does  the 
amount  of  assets  found  within  the  state.  The  amount  of 
business  carried  on  could  be  determined  from  reports 
from  the  corporations  subject  to  investigation  by  the 
state  officials. 

The  method  just  outlined  would  be  preferable  to  an 
income  tax  which  has  been  advocated  by  many.  Such  a 
tax  would  be  satisfactory  and  just,  no  doubt,  if  income 
were  taken  as  the  basis  of  taxation  for  domestic  compan- 
ies as  well.  But  if  we  take  a  percentage  of  the  income 
from  foreign  companies  while  we  tax  domestic  compan- 
ies on  their  capital  stock,  we  would  be  taxing  companies 
carrying  on  a  similar  business  upon  different  bases  and 
could  not  hope  to  realize  the  desired  equality.  If  the  state 
should  adopt  some  other  method  than  the  capital  stock 
basis  for  its  domestic  corporations,  then  we  could  apply 
the  same  to  the  foreign  companies.  Whatever  the  meth- 
ods in  use,  however,  it  should  be  applied  to  both  in  order 
that  as  near  an  equality  as  possible  be  attained.53 

58  The  Joint  Legislative  Committee  on  Taxation,  which  made  a 
report  to  the  legislature  February  19,  1916,  pointed  out  the  need 
for  changing  the  method  of  taxing  foreign  corporations.  The  evils 
of  the  present  system  were  enumerated  but  no  remedies  suggested. 
The  part  of  the  report  dealing  with  foreign  corporations  closes : 
"From  every  point  of  view,  whether  from  that  of  the  cost  of  the 
service,  the  benefit  derived  or  the  ability  to  pay,  the  answer  is  clear : 
foreign  corporations  should  contribute  liberally  to  the  support  of 
New  York  State  government." 


CHAPTER   V. 

TAXATION    OP    INSURANCE   COMPANIES   AND    MANU- 
FACTURING  CORPORATIONS 

In  the  preceding  chapter  we  noticed  that  foreign  in- 
surance companies  were  subject  to  special  taxes  in  New 
York.  This  was  not  at  first  true  of  domestic  companies 
which  were  taxed  on  their  capital  stock  under  the  general 
tax  laws  of  1823  and  1828.  In  1824  the  legislature  gave 
a  few  specified  insurance  companies  the  privilege  of  pay- 
ing to  the  treasurer  of  the  county  in  which  they  did  busi- 
ness ten  per  cent  upon  all  dividends,  profits,  or  incomes 
in  lieu  of  the  tax  on  capital  stock.1  The  variable  nature 
of  the  capital  stock  of  insurance  companies  proved  to  be  a 
source  of  difficulty  in  applying  the  tax.  The  matter  was 
brought  to  the  attention  of  the  legislature  by  the  Renssel- 
aer Insurance  Company.  On  June  20,  1820  it  had  a  capi- 
tal stock  of  $199,880.90,  but  a  cinflagration  loss  reduced 
it  to  $87,536.45.  In  182 1  it  was  increased  to  $101,- 
781.89,  but  it  was  still  assessed  on  the  amount  before  the 
loss.  The  legislature,  upon  receiving  the  company's  peti- 
ion,  enacted  that  the  sum  last  named  above  should  be  tak- 
en as  its  capital  stock  until  additions  were  made  to 
it.  The  general  insurance  law  of  1849  made  provision 
for  uniform  reports  as  to  the  amount  of  capital  stock  and 
other  financial  details  but  made  no  change  in  taxation. 

The  rise  of  mutual  companies  created  a  new  problem 
for  the  legislature  and  the  courts.  Such  companies  sought 
to  escape  taxation  because  they  were  not  formed  under 
the  general  law  neither  had  they  "capital  stock."  At- 
tempts to  assess  capital  stock  to  them  led  to  litigation.  The 
Buffalo  Mutual  Insurance  Company  had  a  fund  of  $100,- 
000  invested  in  securities,  the  income  from  which  went  to 

,New  York  Statutes,  1824,  Chap.  321. 

77 


78  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

the  policy  holders.  The  company  had  no  other  invested 
capital  yet  this  fund  could  not  be  withdrawn  or  divided. 
It  was  virtually  a  trust  fund  for  the  policy  holders.  The 
court  held  that  the  company  was  a  moneyed  or  stock  cor- 
poration deriving  an  income  and  was  liable  to  taxation 
upon  such  a  fund  as  caiptal2  The  Sun  Mutual  Company 
had  been  accumulating  a  surplus  from  premiums  paid 
in  by  members  as  a  fund  from  which  to  meet  the  losses 
and  expenses  that  might  arise  during  its  existence.  Cer- 
tificates were  issued  to  the  members,  which  stated  their  in- 
terest in  the  surplus  fund.  The  court  held  that  wherever 
a  mutual  insurance  company  accumulated  from  its  profits 
a  fund  to  continue  liable  for  its  losses  during  the  term 
of  its  existence,  and  issued  certificates  to  members  stating 
their  interest  therein,  such  accumulation  became  capital. 
The  certificates  were  not  evidence  of  debt  but  represent- 
ed the  interest  of  the  members  in  the  capital,  and  such  a 
company  was  liable  to  taxation  upon  the  capital  so  accum- 
ulated.2 A  number  of  other  cases  that  raised  virtually  the 
same  issues  were  decided  in  the  same  way.3  The  legisla- 
ture finally  cleared  these  issues  by  first  declaring  that  the 

2  Buffalo  Mutual  Insurance  Company  vs  Supervisors,  4  Comstock, 
443. 

2  Sun  Mutual  Insurance  Company  vs  City  of  New  York,  8  N.  Y., 
241. 

8  The  fees  exacted  from  insurance  companies  for  the  performance 
of  certain  transactions  have  varied  at  different  times.  In  1853  one 
law  (Chap.  463)  provided  for  fees  payable  by  life  and  health  com- 
panies while  another  (Chap.  466)  imposed  similar  requirements  on 
fire  insurance  companies.  A  declaration  was  to  be  filed  in  the  office 
of  the  comptroller,  setting  forth  intentions  to  form  a  company,  for 
which  a  fee  of  twenty  dollars  was  to  be  collected.  For  depositing 
their  certified  charter  and  securities  foreign  companies  were  assess- 
ed a  like  fee.  For  every  paper  filed  by  the  county  clerk,  he  was  to 
charge  ten  cents.  Under  the  act  which  established  the  state  insur- 
ance department  in  1850  (Chap.  366)  the  fees  were  increased.  Thirty 
dollars  were  assessed  for  filing  the  declaration  or  certified  charter; 
twenty  dollars  for  filing  the  annual  statement ;  three  dollars  for 
every  certificate  of  agency;  one  dollar  for  filing  each  folio  of  paper 
in  the  office.  The  fees  were  to  meet  the  expense  of  maintaining 
the  insurance  department.  In  case  they  should  fail  to  do  this,  the 
deficiency  was  to  be  assessed  annually  pro  rata  upon  all  stock  in- 
surance companies  of  the  state.  In  1868  (Chap.  732)  the  fee  for 
filing  the  annual  statement  by  all  marine  and  life  insurance  com- 
panies was  fixed  at  fifty  dollars. 


INSURANCE  COMPANIES  AND  MANUFACTURING  CORPORATIONS  79 

mutual  companies  were  taxable4  and  later  by  taxing  them 
on  an  arbitrary  sum  of  $100,000  personal  property  and 
no  more.5 

For  many  years,  then,  insurance  companies  had  been 
taxed  like  other  corporations,  and  there  is  very  little  indi- 
cation that  it  was  thought  they  should  be  taxed  otherwise. 
Evidence  of  the  growth  of  a  new  opinion,  however,  is 
found  in  an  editorial  of  the  New  York  Times  in  1879: 

Insurance  companies  require  distinct  treatment.  Rules  applicable 
to  other  corporations  are  inapplicable  to  these  or  to  any  corporation 
whose  operations  invilve  the  exercise  of  thrift  or  prudence  on  the 
part  of  the  public.  Fire  and  marine  insurance  companies  maintain 
indeed,  certain  general  resemblances  to  other  forms  of  business  and 
are  not  likely  to  be  injured  by  the  taxation  of  their  capital  and  of 
so  much  of  their  accumulations  as  may  be  found  in  real  estate. 
Life  insurance  stands  upon  a  different  footing.  ...  So  many 
of  the  companies  as  possess  stock  capital  can  be  taxed  on  that  item 
and  all  of  them  properly  be  taxed  on  the  basis  of  surplus.  To  the 
extent  of  the  reserve  requied  for  the  fulfillment  of  a  company's 
obligations  to  its  policy  holders,  the  assets  are  a  trust  fund  which  it 
were  criminal  to  touch.  The  surplus  ,though,  in  a  mutual  company, 
belonging  to  the  policy  holders  may  be  assessed  without  danger  or 
injustice;  in  a  stock  company  where  more  or  less  of  it  may  be  claim- 
ed by  holders  of  stock  which  never  rendered  service,  the  surplus  not 
only  may  but  should  be  taxed  as  vigorously  as  the  inflated  stock  of 
a  railroad  company.8 

Further  evidence  of  dissatisfaction  with  the  situation 
is  found  in  the  report  of  the  State  Assessors  for  1874. 
The  taxes  paid  by  insurance  companies  they  said  were 
almost  negligible  as  compared  with  their  capital  and  their 
business.  Comparatively  few  made  the  returns  required 
by  the  tax  law.7  Again  in  1880  the  assessors  suggested 
that  although  the  surplus  of  mutual  insurance  companies 
is  likely  to  be  largely  invested  in  United  States  securities 
which  cannot  be  taxed  directly,  yet  it  is  within  the  power 
of  the  legislature  to  use  the  amount  of  the  surplus  as  the 
measure  of  a  franchise  tax.  The  taxation  of  such  com- 
panies, they  held,  should  not  be  repressive,  for  the  busi- 
ness   of    insurance    should    not    be    discouraged.     They 

4  New  York  Statutes,  1853,  Chap.  469. 

5  New  York  Statutes,  1855,  Chap.  83. 

•  New  York  Times,  Apr.  8,  1879. 

7  Annual  Report  New  York  State  Assessors,  Senate  Documents, 
74,  Vol.  1,  No.  23. 


80  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

thought  it  no  more  than  fair,  however,  that  the  compan- 
ies should  pay  something  to  the  state  which  created  and 
protected  them.  They  suggested  a  tax  of  one  per  cent 
or  three-fourths  of  one  per  cent  upon  so  much  of  the  sur- 
plus as  exceeded  one  year's  income.  The  measure  of  a 
year's  income  was  to  be  the  average  income  of  the  five 
years  preceding.8 

In  1880  the  legislature  passed  an  act9  taxing  life  insur- 
ance companies.  This  placed  an  annual  tax  upon  the 
franchise  or  business  of  every  life  insurance  company  in- 
corporated under  the  laws  of  the  state.  The  tax  was  to 
be  paid  before  February  1  and  was  to  be  one  per  cent  up- 
on the  gross  amount  of  premiums,  interest,  and  other  in- 
come, exclusive  of  rents,  received  by  the  company  during 
the  year  ending  with  the  preceding  December  31,  from 
persons  residing  in  the  state  or  from  investments  repre- 
sented by  or  based  upon  property  situated  within  the  state. 
Land  and  real  estate  were  to  be  assessed  locally,  but  the 
personalty  and  stock  was  to  bear  no  tax.  At  the  same 
sitting  of  the  legislature,  similar  provision  was  made  for 
other  forms  of  insurance  companies.10  Each  of  these 
companies  was  to  pay  a  tax  of  four-fifths  of  one  per  cent 
upon  the  gross  amount  of  premiums.  This  was  not  at 
first  specified  as  a  franchise  tax,  but  the  next  year  the  leg- 
islature so  defined  it.11 

The  tax  on  life  insurance  companies  did  not  prove  pro- 
ductive.    Although  it  was  not  repealed  until   188712  i* 

"Annual  Report  New  York  State  Assessors,  Senate  Documents, 
1880,  Vol.  1,  No.  26. 

•New  York  Statutes,  1880,  Chap.  534.  Every  company  was  to 
make  a  sworn  statement  to  the  state  treasurer  giving  the  total 
amount  of  premiums,  interest  or  other  income  as  was  the  basis  of 
the  tax.  The  refusal  or  neglect  to  make  the  report  was  declared  a 
misdemeanor,  and  any  one  who  wilfully  made  a  false  statement  was 
to  be  subject  to  the  penalties  of  perjury.  Unpaid  taxes  were  to  be 
collected  by  action  of  the  attorney  general  and  the  Supreme  Court 
was  given  the  power  to  restrain  business  through  an  injunction  un- 
til the  taxes  were  paid.  In  the  case  of  other  companies  ten  per  cent 
was  to  be  added  to  the  tax  if  the  report  was  not  made  within  thirty 
days  of  the  specified  time. 

10  New  York  Statutes,  1880,  Chap.  542. 

"New  York  Statutes,  1881,  Chap.  361. 

M  New  York  Statutes,  1887,  Chap.  699. 


INSURANCE  COMPANIES  AND  MANUFACTURING  CORPORATIONS  81 

was  ineffective,  because  it  lacked  a  provision  stating  its 
purpose.  In  1886  the  Court  of  appeals  held13  that  the 
constitutional  provision  prohibiting  a  tax  unless  its  pur- 
pose were  specially  stated  did  not  apply  to  special  taxes. 
This  made  the  law  valid  and  the  companies  liable  for  all 
the  taxes  which  had  accrued  under  it.  The  Comptroller 
asked  for  a  law  which  would  require  a  payment  of  only 
a  part  of  the  taxes  due  under  the  law  of  188014  but  the 
law  of  1887  repealing  this  also  released  the  companies 
from  liability  for  these  back  taxes.  Hence  life  insurance 
companies  were  paying  practically  nothing  directly  to  the 
state  during  this  period. 

Some  modifications  were  made  in  1886  in  the  taxation 
of  fire  and  marine  insurance  companies.15  They  were 
required  to  make  annual  instead  of  semi-annual  returns 
and  the  tax,  which  was  expressly  stated  to  be  a  tax  upon 
corporate  franchise  or  business,  was  to  be  one-half  of  one 
per  cent  of  the  gross  amount  of  premiums  received  dur- 
ing the  year.  In  190516  this  was  raised  to  one  per  cent 
on  the  amount  of  premiums  and  life  insurance  compan- 
ies were  put  upon  the  same  basis.  By  this  law  foreign 
and  domestic  companies  are  treated  alike  except  for  fees 
and  retaliatory  taxes.17  Alien  companies,  however,  are 
required  to  pay  only  one  half  of  one  per  cent  upon  prem- 
iums. 

When  insurance  companies  were  taxed  like  other  cor- 
porations it  was  often  difficult  to  determine  just  what  was 
to  be  considered  as  capital  and  surplus.  A  large  amount 
of  litigation  developed,  and  in  almost  every  case  the  de- 
cisions of  the  court  followed  the  contentions  of  the  state. 
A  fire  insurance  company  sought  to  escape  taxation  on 
the  amount  of  money  received  for  unexpired  fire  policies. 

18  Cited  as  authority,  People  vs  Supervisors,  17  N.  Y.,  239. 

"Annual  Report  of  State  Comptroller,  Senate  Documents,  1887. 
No.  48. 

15  New  York  Statutes,  1886,  Chap.  679. 

"  New  York  Statutes,  1905,  Chap.  94. 

17  Retalitory  taxes  aim  to  get  even  with  other  states  imposing: 
taxes  on  New  York  insurance  companies.  The  law  states  that  New 
York  will  impose  as  high  taxes  on  the  companies  of  any  state  doing 
business  within  the  state  as  are  imposed  against  New  York  com- 
panies in  that  state. 


82  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

The  court  held,18  however,  that  so  much  of  this  as  was 
in  excess  of  a  sum  sufficient  to  cover  the  contingent  lia- 
bility of  the  company  was  to  be  counted  as  surplus.  One 
company  sought  to  evade  taxation  by  issuing  scrip  to  the 
policy  holders  and  retaining  the  fund.  The  court  held 
that  this  was  properly  included  in  the  assessment  of  the 
company.19  Neither  would  the  court  sanction  the  idea 
that  the  surrender  value  of  policies  constituted  a  debt 
which  should  be  deducted,20  or  that  the  shares  should  be 
assessed  at  the  rate  at  which  they  sold  in  the  open  market 
during  the  year.21  A  number  of  other  cases  came  up  but 
410. 

these  suffice  to  show  the  way  in  which  the  nature  of  the 
business  of  insurance  enhanced  the  difficulties  of  reaching 
a  proper  assessment.  The  consensus  of  the  court  decis- 
ions was  that  all  the  assets  of  the  company  over  and  above 
the  contingent  liabilities  were  to  be  taken  as  the  proper 
basis  for  assessment.  So  far  as  clearness  and  ease  of  ad- 
ministration are  concerned,  the  present  system  is  much 
better. 

To  what  extent  insurance  companies,  and  life  insur- 
ance companies,  in  particular,  should  be  taxed  or  whether 
they  should  be  taxed  at  all,  are  questions  upon  which 
there  is  great  variance  of  opinion.22  New  York  legisla- 
tors have  pursued  a  more  lenient  course  than  has  often 
been  advocated.  It  is  often  contended  that  insurance 
companies  should  be  taxed  only  very  lightly,  if  at  all, 
since  the  burden  falls  upon  the  policy  holder.  When  a 
tax  is  placed  upon  a  fire  insurance  company  it  must  mean, 
in  general,  a  higher  premium,  to  the  insured  and  in  many 
cases  a  still  further  shifting  until  the  incidence  is  upon 

" Insurance  Company  vs  Commissioner  of  Taxes,  76  N.  Y.,  64. 

"American  Fire  Insurance  vs  Commissioner  of  Taxes,  91  N.  Y., 
670. 

"  Insurance  Company  vs  Davenport,  91  N.  Y.,  574. 

"  Knickerbocker  Fire  Insurance  Company  vs  Coleman,  44  Hun, 

M  For  discussion  of  insurance  taxation  see :  State  and  Local 
Taxation,  1907,  1909 ;  paper  by  F.  L.  Hoffman,  National  Conference 
on  Taxation,  Buffalo,  1901 ;  Yale  Readings  in  Life  Insurance  by 
Zartman;  Life  Insurance  and  Other  Subjects  by  Dryden;  Reports 
of  special  tax  commissions  of  various  states,  especially  Virginia, 
Nebraska,  and  Wisconsin,  give  discussions  on  insurance  taxation. 


INSURANCE  COMPANIES  AND  MANUFACTURING  CORPORATIONS  83 

the  consumer  in  the  form  of  higher  prices  for  the  goods 
that  he  buys.  Much  the  same  objections  are  made  to 
taxes  upon  life  insurance  companies.  Life  insurance,  it 
is  contended,  is  an  institution  which  makes  for  the  public 
welfare,  and  the  decrease  of  the  burdens  of  government 
in  providing  for  many  people  who  might  otherwise  be 
dependents.  This  general  point  of  view  has  been  well 
expressed  by  the  Independent. ,23 

A  tax  on  any  interest  of  any  life  insurance  policy  holder  is  in- 
defensive.  It  closely  approximates  a  tribute  laid  upon  a  cemetery 
lot.  To  the  vast  majority  of  men  a  life  insurance  premium  is  a 
sacrifice;  in  varying  degrees  it  represents  extra  effort  or  self-denial 
It  is  a  burdent  upon  which  the  unwisdom  of  legislation  lays  another 
burden.  This  mistake  is  due  to  ignorance — to  a  confusion  of  ideas. 
Men  are  often  misled  by  names,  missing  the  nature  of  the  things 
the  names  represent.  It  is  fairly  probable  that  life  insurance  ac- 
cumulations would  be  exempted  from  taxation  if  from  the  begin- 
ning they  had  been  called  burial  funds  or  widows  and  orphans  or 
old  age  pension  funds.  That  is  exactly  what  they  are.  There  is 
prevalent,  even  among  policy  holders,  an  erroneous  idea  respecting 
the  nature  of  the  vast  accumulations  held  by  the  combined  com- 
panies. They  carelessly  look  upon  them  as  vast  accumulations  of 
surplus  wealth.  This  comes  from  the  fact  that  they  are  concen- 
trated and  the  amount  is  exceedingly  large,  and  yet  in  the  usual 
meaning  of  the  terms  they  are  neither  wealth  nor  surplus.  They 
are  every  dollar  of  them,  expense  funds,  small  contributions  of  hard 
earned  money  saved  up  against  the  time  when  the  universal  enemy 
shall  desolate  the  households  of  the  contributors.  Not  a  penny  of 
the  money  dedicated  to  such  use  should  be  seized  by  the  government. 

This  is  not  wholly  an  inaccurate  picture  of  the  nature  of 
the  life  insurance  business.  Yet  it  is  greatly  exaggerated. 
By  no  means  are  all  premiums  paid  by  those  to  whom 
such  payment  is  a  heavy  burden  nor  is  it  always  done  for 
"burial  funds."  This  is  true  at  best  only  of  industrial 
insurance.  Many  persons  use  the  insurance  policy  as  an 
investment  or  savings  device  upon  which  the  reflected 
tax  in  an  increased  premium  would  not  be  a  material  bur- 
den.24 

The  opponents  of  life  insurance  taxation  follow  the 
line  of  argument  that  has  been  indicated.    The  beneficent 

*  Independent,  May  8,  1913,  Vol.  74. 

34  That  a  tax  is  shifted  to  the  policy  holder  is  generally  recognized. 
It  is  a  cost  of  insurance.  In  participating  companies  it  is  reflected 
in  lower  dividends  while  in  non-participating  companies  the  prem- 
iums are  higher  than  they  would  otherwise  need  to  be. 


84  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

features  of  the  system  are  extolled;  the  provision  for 
widows  and  orphans  is  emphasized  ;the  burden  lifted  from 
the  state  in  the  care  of  dependents  is  magnified.  Life  in- 
surance is  pictured  as  a  provision  for  the  future — an  in- 
centive to  providence  and  thrift.  The  assets  of  the  com- 
panies are  but  the  accumulated  savings  of  the  policy  hold- 
ers. A  tax  upon  life  insurance,  then,  they  claim,  is  a  tax 
upon  savings,  a  penalty  upon  thrift  and  falls  where  it  is 
particularly  burdensome.  This  is  not  merely  unjust  but 
it  has  the  further  ill  effect  of  diminishing  the  volume  of 
life  insurance. 

If  we  carry  this  argument  to  its  logical  conclusion  it 
would  condemn  a  large  part  of  the  present  general  sys- 
tem of  taxation.  "Taxes  upon  life  insurance  are  upon 
thrift  and  savings."  But  the  general  property  tax  is  pre- 
cisely such  a  tax.  Men  make  provision  for  the  future  by 
accumulating  savings  and  capital  and  are  penalized  for 
doing  this  by  a  tax.  One  may  put  his  savings  into  a 
house,  another  may  take  out  an  insurance  policy.  It  is 
hard  to  see  enough  difference  between  the  two  classes  to 
afford  a  basis  for  discrimination  between  them  in  the 
matter  of  taxation.  A  tax  upon  insurance  is  not  a 
unique  tax;  it  is  logically  a  part  of  the  general  scheme 
which  we  have  adopted.  The  contentions  of  its  oppon- 
ents, carried  their  logical  conclusion,  would  leave  as  the 
basis  for  our  taxes  only  those  social  values  which  have 
no  connection  with  individual  savings.  In  regard  to  this 
tax  upon  savings  and  thrift,  Professor  T.  S.  Adams  says : 

It  is  perfectly  true  that  a  tax  on  insurance  paid  by  the  policy 
holder  tends  to  discourage  thrift.  But  that  is  not  in  itself  sufficient 
reason  for  abolishing  such  taxes.  In  the  first  place,  our  tax  system 
similorly  discourages  thrift  at  many  points ;  savings  banks  are  taxed 
in  most  states ;  and  the  small  homesteads  in  which  wage-earners  and 
salaried  clerks  invest  their  savings  are  more  heavily  taxed  in  all 
probability  than  any  other  class  of  property  except  the  estates  or 
widowed  and  orphaned  children  in  the  process  of  administration  and 
settlement.  In  fact,  our  whole  system  of  state  taxation,  falling  prin- 
cipally on  realized  or  accumulated  wealth,  is  a  huge  engine  for  the 
taxation  of  savings  and  capital — the  two  principal  means  by  whicn 
thrifty  people  provide  against  future  emergencies.  An  insurance 
is  merely  a  method  of  co-operative  saving  with  an  ingenious  provis- 
ion that  if  any  co-operator  is  prevented  by  death  from  continuing 
his  saving,  the  more  fortunate  surivors  shall  do  a  stipulated  amount 
of  saving   for  him.     Furthermore,   this   system  of   taxing  savings, 


INSURANCE  COMPANIES  AND  MANUFACTURING  CORPORATIONS  85 

and  accumulated  wealth  has  been  delberately  adopted  and  will  not 
be  abandoned.  The  civilized  nations  of  the  world  have  committed 
themseles  to  the  general  policy  of  levying  taxes,  so  far  as  possible, 
in  proportion  to  ability,  not  disability;  according  to  strength,  not 
weakness;  and  as  the  thrifty  man  is  usually  the  able  and  strong 
man,  he  will  continue  to  pay  most  of  the  taxes The  sim- 
ple truth  is  that  no  instrument  of  social  reform  is  in  general  more 
ineffective,  more  disappointing  or  more  illusory  than  taxation. 
Every  tax  has  some  incident  or  collaterial  social  effect.  This  truth 
furnishes  sufficient  reason  perhaps,  why  we  should  temper  or  shade 
the  general  rule  here  or  there.  But  it  proides  no  justification  for 
the  essential  modification  of  the  general  rule.26 

Another  objection  to  life  insurance  taxation  is  voiced 
in  the  old  cry  of  "double  taxation."  The  assets  of  the 
insurance  companies  are  securities — mere  evidences  of 
ownership.  The  property  which  they  represent  is  already 
taxed  to  the  corporaton  which  issued  them  and  should 
not  be  taxed  to  the  insurance  company.  We  have  noted 
elsewhere  that  "double  taxation"  is  not  in  itself  neces- 
sarily an  evil,  but  is  only  such  when  it  leads  to  an  unjust 
distribution  of  the  aggregate  burden  of  taxation. 

Whether  securities  as  a  whole  should  be  exempt  from 
taxation  is  one  question ;  how  we  are  going  to  tax  insur- 
ance companies,  if  at  all,  under  the  existing  system  of  tax- 
ation is  quite  a  different  queston.  The  majority  of  states 
have  not  seen  fit  to  exempt  from  taxation,  securities  in 
the  hands  of  individuals.  There  seems  to  be  no  reason 
for  exempting  a  company  which  makes  similar  invest- 
ments. In  fact  it  merely  acts  as  middleman  for  the  in- 
vestor. It  seems  rather  absurb  to  say  to  a  man,  "If  you 
invest  $5000  in  bonds  we  will  tax  you  upon  it,  but  if  you 
let  the  insurance  company  invest  it  for  you  we  will  not 
tax  you."  If  a  remedy  is  needed  here  it  is  not  in  insur- 
ance taxation  but  in  the  general  scheme. 

Even  if  we  grant  that  life  insurance  should  be  fostered 
by  minimizing  the  burdens  placed  upon  it,  we  cannot  go 
so  far  as  to  justify  an  entire  exemption  from  payments 
to  the  state.  If  life  insurance  companies  are  to  serve  their 
purpose,  their  solvency  must  at  all  times  be  absolutely 
assured.  Experience  has  shown  that  this  necessitates 
thorough-going  state  regulation.     New  York  has  main- 

28  Address  before  the   fourth   annual  meeting  of  the  Association 
of  Life  Insurance  Presidents,  Chicago,  1910. 


86  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

tained  an  insurance  department  for  this  purpose  since 
1857.  Such  a  department,  however,  should  go  further 
than  merely  to  certify  that  companies  are  solvent.  It 
should  guarantee  that  the  premiums  charged  are  no  high- 
er than  are  reasonably  necessary  to  properly  carry  on  the 
business.  When  the  state  certifies  to  the  solvency  of  a 
company  and  the  reasonableness  of  its  premiums,  it  is 
performing  a  special  service  for  particular  individuals — 
the  policy  holders  and  their  beneficiaries — and  it  is  but 
just  that  they  should  bear  the  expense. 

Taking  into  account  both  the  nature  of  insurance  busi- 
ness and  our  present  system  of  taxation,  we  cannot  grant 
the  contention  that  the  treatment  of  life  insurance  com- 
panies should  be  especially  lenient.  The  problem  is  to 
hit  upon  some  from  of  taxation  which  will  be  equitable 
as  between  insurance  and  other  forms  of  investment.  The 
difficulties  are  increased  because  of  the  fact  that  individ- 
ual companies  do  business  in  so  many  different  states  and 
because  of  the  various  forms  of  insurance  companies. 
The  length  of  time  a  company  has  been  in  existence  is 
another  factor  which  must  be  considered.  We  must  also 
avoid  eroneous  premises  upon  which  arguments  for  the 
taxation  of  insurance  companies  are  sometimes  based. 
Premiums  are  sometimes  called  "income,"  which  is  no 
more  accurate  than  to  call  the  deposits  in  a  bank  its  in- 
come. Then  it  is  often  thought  that  the  "dividends"  to 
policy  holders  are  a  measure  of  the  profitableness  of  an 
insurance  business.  These  are  not  comparable  to  divi- 
dends paid  by  an  ordinary  business  corporation  to  its 
stockholders,  but  are  merely  a  return  of  part  of  the  prem- 
ium, which,  for  the  sake  of  absolute  safety,  has  been  larg- 
er than  really  necessary. 

The  "cash  surrender  value"  feature  of  most  modern 
insurance  policies  would  in  itself  seem  to  make  them  a 
legitimate  part  of  the  basis  of  the  present  system  of  tax- 
es. Like  a  bank  deposit,  this  is  a  demand  right  to  money. 
The  fact  that  the  surrender  value  is  less  than  the  aggre- 
gate amount  of  premiums  paid  in  makes  no  essential  dif- 
ference.    The  risk  that  the  company  has  carried  has  been 


INSURANCE  COMPANIES  AND  MANUFACTURING  CORPORATIONS  87 

paid  for  by  the  difference  between  the  surrender  value 
and  the  premiums  paid. 

The  tax  which  is  now  most  generally  used  by  the  states 
is  a  percentage  tax  upon  gross  premiums.  In  New  York 
it  is  one  per  cent,  which  is  lower  than  in  most  states.  Be- 
cause of  its  general  use  and  the  firm  grasp  of  some  sort 
of  taxation  upon  insurance  companies,  some  insurance 
officials  have  asked  that  the  one  per  cent  rate  upon  prem- 
iums be  made  the  uniform  rate  everywhere. 

The  premium  tax  is,  however,  open  to  some  valid  ob- 
jections. Professor  Zartmah  has  urged27  that  such  a  tax 
discriminates  among  policy  holders  of  different  states, 
among  holders  of  different  kinds  of  policies,  and  among 
policy  holders  and  other  tax  payers.  The  first  discrimina- 
tion results  from  the  premiums  employed;  the  second, 
from  different  premiums  paid  on  different  kinds  of  poli- 
cies; and  the  third  form  from  the  fact  that  the  rate  on 
premiums  does  not  fluctuate  with  the  rate  on  other  prop- 
erty. Because  of  these  difficulties  Professor  Zartman 
would  give  up  the  premium  basis.  Any  increase  in  the 
premium  to  meet  a  new  tax  would  work  injustice  upon 
future  policy  holders.  The  present  policy  holder  has 
contracted  for  a  fixed  premium,  and  it  is  only  the  new 
policy  holder  who  can  be  made  to  pay  the  tax.  This  is 
particularly  applicable  to  stock  companies,  for  in  partici- 
pating companies  the  tax  could  be  met  from  reduced 
dividends.  This  objection,  of  course,  is  not  peculiar  to 
insurance  taxation  but  applies  equally  to  many  sorts  of 
"new  taxes."  While  the  premium  tax  does  work  these 
discriminations,  yet  it  is  easily  assessed  and  collected  and 
unless  some  more  just  scheme  be  devised  it  should  not  be 
thrown  aside. 

No  scheme  has  been  devised  which  mets  the  theoret- 
ical and  practical  tests  of  justice.  The  regulatory  ex- 
penses can  be  met  by  fees  and  shifted  to  the  policy  hold- 
ers through  higher  premiums.  If  New  York's  personal 
property  tax  were  other  than  farcical,  a  system  might 
be  worked  out  on  the  basis  of  the  equity  of  the  policy 

27  Address  before  the  second  annual  meeting  of  Life  Insurance 
Presidents,  New  York,  1908. 


88  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

holder  represented  by  the  cash  surrender  value.  Should 
the  state  adopt  an  income  basis  for  taxes,  it  would  be 
comparatively  easy  to  secure  franchise  taxes  by  assessing 
the  company's  income.  The  federal  tax  law  has  decided 
what  shall  constitute  the  income  of  insurance  companies, 
and  this  basis  could  be  used  for  state  purposes.  Here 
the  large  investments  of  older  companies  representing  the 
equity  of  a  large  number  of  paid  up  policies  would  con- 
tinue to  be  taxed,  while  under  the  present  system  the 
heavier  burdens  fall  upon  the  newer  companies.  Under 
a  general  income  tax,  dividends  paid  to  policy  holders 
and  the  amount  received  by  the  beneficiary  in  excess  of 
premiums  paid  could  be  taxed  to  the  recipient  as  a  part 
of  his  income.  So  long  as  the  present  general  tax  system 
remains,  however,  the  tax  on  premiums  may  serve  as  well 
as  any  other. 

TAXATION  OF  MANUFACTURING  CORPORATIONS28 

We  have  seen  that  in  i8i7the  policy  of  using  the  tax  sys- 
tem to  encourage  manufacturing  interests  in  the  state  was 
adopted.  In  some  form  or  other  this  policy  has  been  pretty 
generally  followed  although  not  to  the  full  extent  that 
its  advocates  have  urged.  This  was  shown,  for  example, 
in  the  agitation  for  tax  reform  in  the  seventies.  The 
New  York  Times  held  that  the  exemption  of  personal 
property  from  taxation  in  England,  France,  and  Holland 
was  an  encouragement  to  industry  in  those  countries. 
In  this  country  Maine  and  Vermont  exempted  manufac- 
turing capital  from  taxation.  Most  of  the  states,  howev- 
er, New  York  included,  burdened  industry  with  local 
taxes.  This  was  held  to  be  a  disadvantage  in  competi- 
tion with  foreign  producers.29  In  his  proposals  for  tax 
reform  presented  before  the  committee  of  ways  and 
means,  October  6,  1874,  Mr.  George  H.  Andrews  pro- 
posed to  exempt  the  shares  of  all  maufacturing  corpor- 

n  There  is  no  logical  reason  except  that  of  convenience  why  in- 
surance companies  and  manufacturing  corporations  should  be  treat- 
ed in  the  same  chapter.  The  only  point  of  similarity  is  that  both 
are  exempt  from  the  franchise  tax  on  capital. 

29  New  York  Times,  Feb.  17,  1871.  Editorial. 


INSURANCE  COMPANIES  AND  MANUFACTURING  CORPORATIONS  89 

ations  carrying  on  manufacturing  within  the  state.  If 
for  no  other  reason,  he  says,  the  fact  that  such  is  the  prac- 
tice in  some  other  states  would  be  sufficient. 

In  the  revision  of  the  tax  laws  in  1880,30  "manufac- 
turing companies  carrying  on  manufacturing  in  the  state" 
were  exempted  from  the  annual  franchise  tax.  In  con- 
struing this  provision  the  courts  held31  that  it  was  not 
limited  to  companies  organized  under  the  general  manu- 
facturing act,  but  included  all  companies  under  whatever 
law  incorporated,  whose  principal  business  was  manu- 
facturing. The  law  was  applicable  to  foreign  as  well  as 
domestic  corporations,  but  where  a  foreign  company  only 
did  some  incidental  work  in  connection  with  its  manufac- 
tured products  sent  here  to  fit  them  for  the  market  it  could 
not  claim  exemption  from  taxation  under  the  law.32  The 
obvious  difficulty  in  regard  to  companies  only  a  part  of 
whose  capital  was  employed  in  manufacturing  was  reme- 
died by  the  law  of  1889.33  This  limited  the  exemption 
to  corporations  whose  business  in  New  York  was  exclu- 
sively manufacturing.  If  a  company  was  not  wholly  en- 
gaged in  manufacturing  but  was  also  engaged  in  selling 
in  a  city  within  the  state  goods  manufactured  by  it  out 
of  the  state  and  also  of  selling  articles  not  of  its  own  man- 
ufacture, it  was  subject  to  the  tax.34  It  still  remained 
difficult,  however,  to  determine  in  particular  cases  wheth- 
er a  company  was  engaged  in  "manufacturing." 

At  the  request  of  the  Comptroller35  the  law  was  amend- 
ed in  189636  so  as  to  exempt  that  part  of  the  capital 
of  domestic  and  foreign  manufacturing  corporations 
which  was  employed  in  manufacturing,  thus  putting  for- 
eign and  domestic  companies  on  an  equal  footing.  It 
did  not  however  remove  the  difficulty  in  deciding  what 
the  term  "manufacturing"  included.     Companies  engag- 

80  New  York  Statutes,  1880,  Chap.  242. 

81  Gas  Light  Company  vs  Brooklyn,  89  N.  Y.,  409. 
"People  vs  Wemple,  138  N.  Y.,  582. 

88  New  York  Statutes,  1889,  Chap.  353. 
84  Western  Electric  Company  vs  Campbell,  145  N.  Y.,  587. 
"Annual  Report  of  New  York  State  Comptroller,  18%. 
88  New  York  Statutes,  1896,  Chap.  908. 


90  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ed  in  both  manufacturing  and  merchandising  were  ex- 
empt from  tax  upon  the  amount  of  capital  employed  in 
the  former  use  but  not  in  the  latter.  How  were  the  offi- 
cials to  decide  how  much  was  invested  in  each?  The 
court  opinions  were  apparently  conflicting.  A  law  of 
1 90 1,37  however,  makes  it  necessary  that  at  least  forty 
per  cent  of  the  capital  stock  of  corporations  be  invested  in 
property  within  the  state  and  be  used  by  it  in  manufactur- 
ing business  if  the  company  is  to  be  exempt  from  the  an- 
nual franchise  tax  on  capital  stock.  A  similar  provision 
applies  to  mining  and  laundry  companies.  This  simpli- 
fies the  administrative  problem  by  introducing  an  arbi- 
trary rule.  So  long  as  the  organization  tax  was  one- 
eighth  of  one  per  cent  a  large  number  of  manufacturing 
companies  whose  entire  business  was  in  New  York  were 
chartered  in  other  states.  In  1900,  the  Comptroller  re- 
ported that  450  such  corporations  had  been  formed  during 
the  preceding  year  under  the  laws  of  a  sister  state.  The  ag- 
gregate capitalization  of  these  companies  was  $250,000,- 
000. 38 

Even  though  manufacturing  capital  be  exempt  from 
the  annual  franchise  tax  it  is  still  assessable  locally  under 
the  law  of  1857,  providing  for  taxation  of  property. 
When  we  say  that  the  local  officials  assess  this,  we  have 
said  enough  to  condemn  the  system.  If  uniformity  is 
needed  in  any  class  of  taxation  it  is  in  the  class  of  manu- 
facturing concerns  since  theirs  is  a  competitive  business, 
and  the  tax  may  mean  the  margin  which  will  spell  suc- 
cess or  failure.  Then  we  have  all  come  to  know  that  capi- 
tal stock,  even  if  it  could  be  properly  assessed,  does  not 
represent  the  value  of  a  business.  Some  companies  are 
doing  a  large  business  on  a  comparatively  small  issue  of 

87  New  York  Statutes,  1901,  Chap.  558. 

"Annual  Report  of  New  York  State  Comptroller,  1900.  A  large 
amount  of  condemnation  has  continually  arisen  from  state  officials 
and  the  press  concerning  "driving  capital  out  of  the  state."  In  this 
particular  case  the  capital  was  employed  entirely  within  the  state 
which,  after  all,  is  the  important  item.  Had  it  not  been  manufac- 
turing capital,  it  would  have  been  taxed.  Whether  "driving  capital 
from  the  state,"  when  the  industry  or  business  is  located  here,  means 
anything  from  the  standpoint  of  taxation  depends  upon  the  similar- 
ity of  the  laws  taxing  foreign  and  domestic  companies. 


INSURANCE  COMPANIES  AND  MANUFACTURING  CORPORATIONS  91 

capital  stock  while  in  others  the  capital  stock  may  be  to 
a  large  extent  "water."  The  latter  is  especially  true  in 
large  combinations.  There  are  approximately  sixteen 
hundred  assessing  districts  in  the  state,  and  there  is  no 
uniform  role  to  insure  equitable  assessments  of  such  prop- 
erty. Even  if  absolute  honesty  existed  among  the  assess- 
ors the  magnitude  and  complexity  of  the  problem  would 
forbid  its  accomplishment.  The  officials,  however,  have 
often  been  accused  of  deliberate  discriminations.  It  has 
been  contended  that  in  some  cases  capital  has  been  driven 
away  or  invited  to  localities  because  the  assessors  either 
enforced  or  did  not  enforce  the  law.  We  are  well  aware 
that  districts  often  offer  incentives  to  industries,  such  as 
tree  factory  sites, etc., and  it  is  not  unreasonable  to  suppose 
that  when  they  have  it  within  their  power,  they  try  to 
offer  advantages  in  respect  to  taxation.  It  is  certain  that 
in  the  local  assessment  of  manufacturing  corporations 
gross  inequality  still  exists. 

There  is  no  good  reason  why  manufacturing  companies 
should  not  bear  their  share  of  the  public  burden.  No 
longer  can  they  be  generally  considered  as  infant  indus- 
tries that  need  the  fostering  hand  of  the  state.  The  men 
who  put  their  capital  into  such  industries  have  no  more 
claim  to  exemption  than  those  in  other  enterprises.  The 
argument  that  the  tax  is  shifted  to  the  consumer  in  higher 
prices  is  no  more  applicable  here  than  in  the  case  of  many 
other  taxes.  The  problem  of  taxing  manufacturing  com- 
panies is  the  problem  of  taxing  capital  in  general  in  a 
just  and  equitable  manner.  The  system  should  be  such 
that  there  will  be  no  discrimination  in  favor  of  particular 
fields  of  business  endeavor.  Because  of  the  nature  of  the 
manufacturing  business  and  the  extended  market  for 
manufactured  products,  uniformity  should  not  be  confin- 
ed to  the  limits  of  any  one  state  but  should  be  extended, 
so  far  as  possible,  to  the  whole  competitive  district. 

It  has  been  recently  contended  that  the  New  York  sys- 
tem of  taxation  tends  to  drive  capital  from  the  state  or 
at  least  offers  little  inducement  for  it  to  enter.  In  resolu- 
ions  adopted  March  30,  19 10  by  the  Rochester  Conference 
on  Taxation  figures  were  cited  to  show  that,  from  1900 


92  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

to  1910,  capital  invested  in  manufacturing  in  New  York 
had  increased  much  more  slowly  than  in  Pennsylvania. 
The  proportionate  increase  of  the  value  of  manufactured 
goods,  wage  earners  and  the  amount  of  horsepower  de- 
veloped were  similar.  The  conclusions,  however,  were 
based  upon  census  statistics,  the  accuracy  of  which  may  be 
questioned.  The  resolutions  asked  that  a  committee  be 
formed  to  further  legislation  to  relieve  manufacturing 
companies.  In  19 10  the  New  York  Board  of  Trade  and 
Transportation  asked  that  something  be  done  to  remedy 
the  situation.  In  his  message  of  191 2  Governor  Dix  ex- 
pressed his  regrets  that  New  York  was  losing  her  place 
as  a  manufacturing  state  because  of  the  burdens  of  tax- 
ation. He  asked  for  reform  and  suggested  the  federal 
income  tax  method  as  worth  considering.39 

Differences  in  the  tax  system  of  New  York  and  other 
states  may  have  had  some  influence  in  determining  the 
growth  of  manufactures.  It  is  certain,  however,  that  too 
much  importance  has  been  attached  to  this  idea.  There 
are  many  other  and  more  important  factors  in  the  situa- 
tion. Only  under  the  rare  conditions  that  the  other  influ- 
ences are  practically  negligible  will  taxation  be  a  deter- 
mining factor.  If  there  were  a  more  rapid  growth  of 
manufacturing  in  Pennsylvania  it  can  doubtless  be  ascrib- 
ed to  other  influences  than  taxation. 

Different  methods  of  taxing  this  class  of  corporations 
have  been  suggested.  Some  have  asked  for  a  uniform 
rate  upon  capital  stock  graduated  by  the  amount  of  divi- 
dends paid.  In  191  o  a  bill  to  impose  a  tax  of  one-eighth 
of  a  mill  upon  the  issued  capital  stock  for  each  one  per 
cent  of  dividends  paid  was  reported  favorably  in  the  Sen- 
ate but  failed  to  pass.  The  main  objection  was  that  the 
dividends  would  be  covered  up  by  high  salaries  in  closed 
corporations  and  in  others  by  creating  a  surplus.  Even 
if  this  difficulty  could  be  eliminated  by  charging  salaries 
over  a  certain  amount,  together  with  annual  surplus  ac- 
cruals, to  dividends,,   such  a  tax  would  not  always  be 

19  Message  of  Governor  Dix,  Assembly  Documents,  1912,  Vol  1, 
No.  2.  The  income  tax  to  which  he  referred  has  been  absorbed  by 
the  general  federal  income  tax. 


INSURANCE  COMPANIES  AND  MANUFACTURING  CORPORATIONS  93 

equitable  because  of  differences  in  capitalization  policies. 
The  problems  of  taxing  manufacturing  corporations  is 
but  a  part  of  the  problem  of  securing  a  just  and  equitable 
general  tax  system.  There  are  no  longer,  if  there  ever 
were,  reasons  why  manufacturing  corporations  should 
constitute  a  special  class  for  purposes  of  taxation.  The 
scheme  that  may  be  chosen  as  just  and  equitable  for  cap- 
ital in  general  should  include  capital  engaged  in  manu- 
facturing enterprises. 


C  H  A  P  T  ER  VI. 

TAXATION  OF  BANKS 

In  New  York,  as  elsewhere,  the  taxation  of  banks  by 
the  state  has  been  complicated  because  of  the  require- 
ments of  federal  statutes.  On  this  account  a  large  num- 
ber of  important  bank  cases  have  been  before  the  courts. 
Bank  stock  was  subject  to  taxation  under  the  provisions 
of  the  first  special  statute  relating  to  the  taxation  of 
corporations.1  Bank  officers  were  required  to  give  to  the 
assessors  a  statement  of  real  estate,  capital  stock  paid  in 
or  secured  to  be  paid  in,  and  the  assessors  were  to  put 
the  amount  of  such  real  and  personal  property  upon  their 
rolls.  The  cashier  or  treasurer  was  to  pay  the  tax  and 
deduct  the  amount  from  the  dividends  of  stockholders  in 
proportion  to  the  amount  of  stock  held  by  them.  As  in 
the  case  of  other  corporations,  none  was  to  be  deducted 
from  dividends  due  to  the  state  or  to  charitable  institu- 
tions. Any  complaints  which  arose  were  taken  directly 
to  the  legislature. 

Thus,  in  1828  the  Commercial  Bank  of  Albany  applied 
to  the  legislature  to  have  its  assessments  of  $300,000  re- 
duced to  $150,000.  This  request  was  granted.2  The 
safety  fund  system  was  adopted  in  1829,  and  under  this 
it  was  necessary  that  all  bank  capital  be  fully  paid  in. 
Banks  were  then  taxed  upon  the  amount  of  their  capital 
(except  so  much  as  was  held  by  the  state  or  charitable 
institutions).  The  tax  was  upon  its  nominal  value,  even 
though,  of  course,  its  shares  might  be  above  or  below 
that  value.3 

1  New  York  Statutes,  1823,  Chap.  262. 

2  New  York  Statutes,  1828,  Chap.  50. 

•  So  held  in  Bank  of  Utica  vs  City  of  Utica,  4  Paige,  399. 

94 


THE  TAXATION  OF  BANKS  95 

The  banking  act  of  18384  did  not  state  whether  banks 
were  to  be  considered  corporations.  It  remained  for  the 
courts  to  decide  that  the  institutions  established  under  the 
act  were  corporations,  and  that  they  were  liable  to  be  tax- 
ed like  other  moneyed  institutions.5  Some  individuals 
continued  to  escape  on  the  ground  that  they  were  not  cor- 
porations. In  1 847°  the  legislature  remedied  this  by  pro- 
viding that  all  individuals  doing  a  banking  business 
should  be  subject  to  tax  on  the  full  amount  of  capital 
stock.  The  tax  was  to  be  upon  the  actual  market  value 
as  estimated  by  the  comptroller,  without  deduction  for 
the  debts  of  such  banker. 

In  1 85 17  the  banking  department  was  established,  the 
expense  of  which  was  to  be  paid  by  the  incorporated 
banks  in  such  proportion  as  the  superintendent  thought 
just  and  reasonable.  If,  however,  any  special  services 
were  performed  for  a  bank,  the  expense  was  to  be  borne 
by  the  bank  for  which  the  service  was  rendered. 

In  his  report  to  the  legislature  in  18538  the  Comp- 
troller pointed  out  that  the  bank  surplus  was  practically 
the  same  as  capital,  and  asked  that  it  be  taxed  in  the  same 
way.  In  that  year  the  general  corporation  tax  law9  was 
passed  which  made  surplus  profits  or  reserve  funds  in 
excess  of  ten  per  cent  of  the  capitl  subject  to  taxation. 
Since  the  banking  associations  were  corporations,  their 
surplus,  in  excess  of  ten  per  cent  of  the  capital,  was  tax- 
able. In  1863,  moreover,  a  law  was  put  upon  the  statute 
books  which  expressly  mentioned  banks  and  banking  as- 
sociations as  subject  to  this  tax.10 

The  most  radical  change  in  the  taxation  of  banks  came 
in  1865.     This  was  necessary  in  order  to  conform  to  the 

*  New  York  Statutes,  1838,  Chap.  260. 

5  Thomas  vs  Dakin,  22  Wendell,  9  and  Bank  of  Watertown  vs 
Assessors,  25  Wendell,  686. 

a  New  York  Statutes,  1847,  Chap.  419. 

1  New  York  Statutes,  1851,  Chap.  164. 

8  Annual  Report  State  Comptroller,  1853. 

•  New  York  Statutes,  1853,  Chap.  654. 
"New  York  Statutes.  1863,  Chap.  240. 


96  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

National  Banking  Act  of  1864,11  which  imposed  limita- 
tions upon  the  powers  of  states  to  tax  national  banks. 

The  New  York  statute  of  186512  was  a  general  law, 
enabling  banks  to  become  associations  for  the  purpose  of 
banking  under  the  laws  of  the  United  States.  With  re- 
spect to  taxation13  it  provided  that  shares  in  any  of  the 
banking  associations  organized  under  the  act  or  the  fed- 
eral statute  were  to  be  included  in  the  valuation  of  the 
personal  property  of  the  owner,  and  assessed  in  the  town 
or  ward  where  the  banking  association  was  located. 
Moreover,  it  was  to  be  assessed  at  no  greater  rate  than 
other  moneyed  capital  in  the  hands  of  individuals.  The 
tax  was  not  to  exceed  the  par  value  of  the  stock,  while 
the  real  estate  of  the  bank  was  to  be  subject  to  local  tax- 
ation. Unless  the  taxes  were  otherwise  paid,  the  bank- 
was  to  withhold  them  from  dividends. 

Under  such  provisions,  then,  national  banks  began  to 
be  taxed.  Their  shares  were  assessed  and  taxed  to  the 
individual  owners  while  the  capital  and  surplus  of  the 
state  banks  were  assessed  to  the  bank.  The  first  impor- 
tant question  which  arose  was  whether  bank  capital  in- 
vested in  United  States  securities  should  be  deducted 
from  the  assessment.     This  was  the  issue  in  a  number  of 

"U.  S.  Statutes  at  Large,  1864,  Chap.  106.  It  provided,  (section 
41),  that  nothing  in  the  act  was  to  be  construed  to  prevent  all  the 
shares  in  any  of  the  said  associations  [National  Banks],  held  by  any 
person  or  body  corporate,  from  being  included  in  the  valuation  of 
the  personal  property  of  such  person  or  corporation  in  the  assess- 
ment of  taxes  imposed  by  any  state  authority  at  the  place  where  the 
bank  was  located.  Such  assessment  and  tax  was  not  to  be  at  a 
greater  rate  than  was  assessed  upon  other  moneyed  capital  in  the 
hands  of  individual  citizens  of  such  state.  It  was  further  provided 
that  the  tax  so  imposed  under  the  laws  of  any  state  upon  the  shares 
of  any  of  the  associations  authorized  by  the  act  was  not  to  exceed 
the  rate  imposed  upon  any  of  the  shares  in  any  of  the  banks  or- 
ganized under  authority  of  the  state  where  such  association  was 
located.  It  further  provided  that  nothing  in  the  act  was  to  exempt 
the  real  estate  of  such  associations  from  either  state,  county  or 
municipal  taxes  to  the  same  extent,  according  to  value,  as  other 
real  estate  was  taxed. 

12  New  York  Statutes,  1865,  Chap.  97. 

"Sections  10  and  11  of  the  above  law. 


THE  TAXATION  OF  BANKS  97 

cases  which  came  before  the  courts.14  and  the  decisions 
were  always  against  the  banks.  The  point  was  finally 
settled  by  the  United  States  Supreme  Court  in  a  case  car- 
ried from  the  Court  of  Appeals.15  The  finding  was  that 
shares  of  banking  associations  formed  by  the  act  of  1864 
were  subject  to  taxation  by  states  without  regard  to  the 
fact  that  a  part  or  a  whole  of  the  capital  was  invesed  in 
national  securities.  Chief  Justice  Chase  with  two  other 
justices  dissented,  however,  in  the  following  language : 
"We  think  such  taxation  is  actual,  though  indirect  tax- 
ation of  the  bonds;  and  that  taxation  of  the  shares  of 
national  banking  associations  without  reference  to  the 
amount  of  capital  invested  in  national  securities,  is  not 
authorized  by  congress." 

These  same  justices  dissented  in  the  case  of  Dyer  vs 
Commissioner  of  Taxes.16    Here  the  shareholder  object- 

14  The  case  of  the  City  of  Utica  vs  Churchhill  (43  Barbour,  550) 
was  one  of  the  first  to  come  before  the  courts.  The  court  held  that 
a  tax  on  the  stockholder  for  the  stock  held  by  him  was  a  proper 
and  legitimate  source  for  state  and  municipal  taxation.  A  tax  upon 
the  stockholder  was  not  to  be  considered  a  tax  upon  the  bank  nor 
on  its  property,  but  upon  property  held  and  owned  by  the  stockhold- 
ers and  in  which  the  bank  had  no  interest.  In  this  case  the  court 
held  that  the  laws  of  the  state  and  not  the  laws  of  congress  were 
to  furnish  the  guide  by  which  to  decide  whether  the  stocks  of 
national  banks  can  be  taxed,  and  the  place  and  manner  of  taxing 
them.  The  basis  for  this  was  that  national  bank  shares  were  per- 
sonal property  and  therefore  assessable  under  New  York  laws.  The 
court  did  not  think  they  could  be  assessed  in  a  ward  where  the  bank 
was  located  when  residence  was  elsewhere.  In  the  next  session 
the  court  took  the  opposite  view  (People  vs  Assessors,  44  Barbour. 
148)  )  by  holding  that  congress  had  the  power  to  modify  the  taxa- 
tion of  national  bank  shares,  and  provide  under  what  circumstances 
it  should  be  execised.  The  amount  of  the  stock  invested  in  United 
States  securities  was  not  to  be  deducted.  When  carried  to  the  Court 
of  Appeals  this  view  was  upheld. 

■  Van  Allen  vs  Assessors,  33  N.  Y .,  161,  70  U.  S.,  573.  In  the 
case  of  Bank  of  Commerce  vs  Commissioner  of  Taxes  (69  U.  S., 
200)  appealed  from  the  Court  of  Appeals  (26  N.  Y.,  163)  the  court 
held  that  a  tax  laid  by  a  state  on  banks  on  a  valuation  equal  to  the 
amount  of  the  capital  stock  paid  in  or  secured  to  be  paid  in,  was  a 
tax  on  the  property  of  the  institution.  When  that  property  con- 
sisted of  stocks  of  the  Federal  Government,  the  law  laying  the  tax 
was  void.  The  only  difference  in  the  two  cases  was  that  one  was 
the  assessment  upon  the  capital  to  the  bank,  and  the  other  the  as- 
sessment upon  shares  to  the  owner. 

"4  Wall.,  244. 


98  DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ed  to  the  tax  because  insurance  companies  were  assessed 
at  a  much  lower  rate,  or,  what  amounted  to  the  same 
thing,  were  assessed  only  on  the  part  of  capital  stock  left 
after  deduction  of  the  amount  invested  in  United  States 
bonds.  The  dissenting  opinion  held  that  a  similar  de- 
duction should  be  made  in  the  case  of  bank  shares.  The 
majority  of  the  court  held,  however,  that  the  clause  in 
question  did  not  refer  to  the  rate  of  assessment  upon  in- 
surance companies  as  a  test  by  which  to  prevent  discrim- 
ination against  the  shares;  that  is,  one  criterion  was  the 
rate  of  assessment  upon  moneyed  capital  in  the  hands  of 
individuals.17 

While  in  the  Van  Allen  case  the  contention  of  the 
state  courts  was  upheld,  the  law  of  1865  was,  neverthe- 
less, declared  unconstitutional.  This  was  upon  the 
ground  that  it  did  not  provide  that  the  tax  imposed 
should  not  exceed  the  rate  imposed  upon  any  bank  or- 
ganized by  the  state.  There  was  no  tax  laid  on  bank 
shares  though  there  was  a  tax  on  capital. 

This  led  to  the  passage  of  the  act  of  April  23,  1866,18 
which  provided  that  thereafter  no  tax  should  be  assesse- 
ed  upon  the  capital  of  any  bank,  but  that  stockholders 
should  be  assessed  and  taxed  on  the  value  of  their  shares. 
Otherwise  the  act  was  much  like  its  predecessor.  While 
this  produced  no  change  in  the  actual  results,  it  met  the 
technical  requirements.  In  making  the  assessment  there 
was  to  be  deducted  from  the  value  of  each  share  such  a 
sum  as  was  in  the  same  proportion  to  its  value  as  was  the 
assessed  value  of  the  real  estate  to  the  whole  value  of  the 
stock  outstanding.  Each  banker  was  required  to  give 
under  oath  the  amount  of  the  capital  invested  in  the  bus- 
iness. The  bank  had  to  keep  at  all  times  in  its  office  a 
full  and  correct  list  of  names  and  residences  of  all  the 
stockholders  together  with  the  number  of  shares  held  by 
each.  Such  lists  were  to  be  open  to  inspection  during 
business  hours. 

17  It  was  not  until  later  that  the  interpretation  of  "moneyed  capi- 
tal in  the  hands  of  individuals"  came  before  the  court.  See  page 
110  for  this  case. 

"New  York  Statutes,  1866,  Chap.  761. 


THE  TAXATION  OF  BANKS  99 

Such  were  the  provisions  of  the  law  under  which  banks 
were  to  be  taxed  for  the  next  several  years.  As  the 
courts  had  held  that  investments  in  United  States  secur- 
ities could  not  be  deducted,  so  they  now  further  held  that 
debts  could  not  be  deducted.19  In  giving  this  opinion  the 
court  said  with  regard  to  the  law  of  1866:  "These  un- 
usual provisions  and  directions  concur  with  the  previous 
legislation  in  indicating  the  the  statuatory  intent  to  estab- 
lish for  bank  shares  a  system  of  taxation  peculiar  to  it- 
self and  independent  of  the  general  system  of  taxation 
existent  in  the  state."  Upon  the  point  of  taxing  the  value 
of  shares  it  said :  "It  is  as  if  they  had  said,  we  cannot 
now  tax  the  national  banks  as  we  have  been  accustomed 
to  do  but  instead  thereof  we  will  tax  their  share- 
holders and  we  will  apply  to  them  the  system  of  taxation 
that  we  have  hitherto  imposed  upon  the  banks,  so  far  as 
it  is  lawful  so  to  do." 

Here,  then,  we  have  the  special  system  of  taxation  de- 
signed for  the  banks,  and  the  interpretations  made  by 
the  courts.  The  shares  were  to  be  assessed  to  the  holders 
but  at  the  place  where  the  bank  was  located.  Such  as- 
sessment, however,  was  not  to  be  at  a  higher  rate  than 
upon  other  moneyed  capital  in  the  hands  of  individuals. 
The  amount  of  the  stock  invested  in  United  States  secur- 
ities and  debts  could  not  be  deducted.  We  shall  now 
examine  how  the  policy  was  received  by  the  banks  and 
the  general  public,  and  what  were  the  general  effects. 

The  decisions  of  the  courts  which  we  have  just  noted 
were  doubtless  a  surprise  to  many.  Before  the  cases  came 
before  the  court,  the  New  York  Times20  pointed  out  that 
the  comptroller  was  making  the  singular  experiment  of 
assessing  national  bank  capital  at  a  higher  rate  than  local 
bank  capital.  In  doing  this  it  suggested  that  he  was  ply- 
ing directly  in  the  face  of  the  National  Banking  Act 
and  of  course  could  not  succeed.  Letters  from  E.  G. 
Spaulding,  drafter  of  the  National  Currency  Bank  Bill 

19  Cogger  vs  Dolan,  36  N.  Y.,  59. 

"New  York  Times,  July  15,  1865. 


100        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

and  the  Legal  Tender  Act,21  and  Freeman  Clark,  Comp- 
troller of  the  National  Currency  were  quoted  at  length 
in  support  of  the  view  taken.  Mr.  Spaulding  concluded 
that  the  shareholders  of  a  national  bank  which  has  a  part 
of  its  capital  invested  in  United  States  securities  were 
only  liable  to  be  taxed  on  the  amount  of  their  share  in 
the  capital  stock  remaining  after  the  amount  invested 
in  such  securities  was  deducted.  If  all  the  capital  were 
so  invested  he  thought  the  stockholder  could  not  be  tax- 
ed at  all.  A  lengthy  legal  opinion  by  Ward  Hunt,  print- 
ed by  the  same  journal,22  concluded:  "Upon  a  careful 
consideration  of  the  provision  of  the  statutes,  state  and 
national,  regulating  the  shares  in  national  banks  for  the 
purpose  of  taxation,  I  am  of  the  opinion  that  such  valua- 
tion is  to  be  ascertained  by  taking  their  actual  value  sub- 
ject to  a  reduction  from  the  shares  of  each  individual  of 
a  proportionable  amount  of  the  capital  invested  in  United 
States  securities."  Taking  these  views  as  representative 
of  a  probably  large  body  of  opinion,  we  see  that  the  find- 
ings of  the  courts  must  have  been  in  some  measure  unex- 
pected.23 

^Mr.  E.  G.  Spaulding  was  chairman  of  the  Senate  sub-committee 
which  drafted  the  bill  providing  for  the  National  Currency  and  the 
Sub.  Treasury  Act.  Because  of  his  influence  in  connection  with  the 
latter  he  has  been  called  the  "Father  of  the  Greenbacks." 

M  New  York  Times,  Aug.  3,  1865. 

23  These  were  the  first  bank  cases  which  came  before  the  Supreme 
Court.  The  first  case  deciding  upon  bond  investments  (69  U.  S., 
200)  arose  from  the  passing  of  the  law  of  1863  (Chap.  240).  Un- 
der the  law  of  1857  the  tax  was  upon  the  capital  stock  assessed  at 
actual  value.  Here  the  court  held  that  the  amount  invested  in  se- 
curities must  be  deducted.  (2  Black,  220)  The  law  of  1863  made 
the  tax  upon  a  Valuation  equal  to  the  amount  of  capital  stock  paid 
in  or  secured  to  be  paid  in.  The  court  reasoned  that  a  tax  on  such 
valuation  was  a  tax  on  the  property  of  the  bank,  and  when  that  prop- 
erty consisted  of  stocks  of  the  Federal  government  the  tax  was 
void.  The  other  case  came  under  the  new  law.  (70  U.  S.,  573) 
Here  the  court  argued  that  a  tax  on  shares  was  not  a  tax  on  gov- 
ernment securities  because  the  tax  was  the  condition  for  the  new 
rights  and  privileges  conferred  upon  the  associations.  If  Congress 
had  the  power  to  grant  these  then  it  was  equally  clear  that  it  had 
power  to  annex  conditions.  The  tax  was  not  upon  securities,  but 
upon  the  rights  and  privileges  conferred  by  the  charter.  Neither 
was  the  tax  one  upon  the  capital  of  the  bank.  The  corporation  was 
the  legal  owner  of  the  property  and  could  deal  with  the  corporate 


THE  TAXATION  OF  BAN K3  \    ;       ',  '.'    \  J  */}f$C>'>  '  • 

The  law  required  that  the  shares  be  assessed  at  their 
actual  value,  and  the  court  held24  that  stock  assessed  at 
par  value  when  the  market  or  actual  value  was  more  than 
this  was  erroneously  assessed.  Yet  there  were  great  ir- 
regularities in  the  assessment  of  the  bank  shares.  Not 
only  were  these  taxed  differently  from  other  property, 
but  the  ratio  of  assessed  to  true  value  varied  greatly  for 
different  banks.  The  Comptroller,  in  his  report  for  1873, 
pointed  out  that  the  rule  of  "actual  value"  assessment 
was  almost  everywhere  violated.  No  uniform  practice 
was  formed  and  the  valuation  was  frequently  at  from 
twenty-five  to  eighty-five  per  cent  of  par  value.25  Only 
a  small  proportion  of  the  capital  of  private  banks  was  as- 
sessed, the  explanation  usually  given  being  that  their  cap- 
ital was  invested  in  government  bonds. 

The  state  assessors  also  condemned  these  inequalities. 
Not  only  were  the  assessments  at  variance  with  the  act- 
ual values,  but  many  different  rates  of  taxes  were  im- 
posed. Two  or  three  different  rates  in  the  same  county 
were  not  unusual.  Negligence  of  the  taxing  officials  some- 
times went  further  than  this.  For  example,  a  bank  in 
one  of  the  western  counties  with  a  capital  of  $200,000 
went  for  several  years  without  being  taxed  at  all,  and  was 
finally  assessed  at  one-third  of  par  value.26 

Even  if  bank  shares  had  been  assessed  according  to 
law,  inequality  would  still  have  existed  as  compared  with 
other  kinds  of  personal  property.  Since  they  were  as- 
sessed where  the  bank  was  located,  and  the  taxes  collect- 
property  as  absolutely  as  a  private  individual  could  deal  with  his  own. 
In  no  legal  sense  were  the  individual  members  the  owners  of  the 
corporate  property  though  they  might  be  interested  in  it.  In  the 
decision  dealing  with  the  deduction  of  debts,  (36  N.  Y.,  59)  the 
reasoning  dealt  with  the  legislative  interest.  It  was  pointed  out  that 
in  all  previous  laws  banks  were  taxed  without  reference  to  the  con- 
dition of  the  share  owners.  Where  debts  were  intended  to  be  de- 
ducted the  laws  specifically  so  stated.  It  was  the  legislative  intent  to 
tax  banks  under  a  different  system  from  that  of  the  general  tax 
law,  and  the  legislature  did  not  intend  that  debts  should  be  deducted. 

M  People  vs  Assessors,  5  Thompson  and  Cook,  155. 

*  Annual  Report  of  New  York  State  Comptroller,  1873. 

"Annual  Report  of  New  York  State  Assessors,  Senate  Docu- 
ments, 1874,  Vol.  2,  No.  23. 


102       .DEVELOPMENT  Ot  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ed  at  the  source,  it  was  difficult  for  bank  shares  to  easily 
escape  taxation.  Neither  was  it  possible  for  banks  arbi- 
trarily to  designate  as  their  "principal  office"  a  locality 
where  the  taxing  officials  were  especially  lenient.  It  was 
the  old  question  of  the  evasion  of  the  personal  property 
tax.  Since  much  of  the  personal  property  was  being 
assessed  at  a  very  small  fraction  of  its  "full  and  actual 
value,"  those  banks  which  were  heavily  taxed  had  what 
seems  a  right  to  complain.  Besides  being  thus  taxed  up- 
on capital  the  banks  were  taxed  upon  their  whole  surplus, 
which  was  not  true  in  the  case  of  other  corporations. 
Governor  Robinson  condemned  this  practice  as  unsound 
since  it  induced  the  banks  to  divide  their  surplus  among 
the  stockholders  thereby  diminishing  the  security  which 
it  gave  to  the  public  so  long  as  held  by  the  bank.27 

Such  a  system  could  not  be  without  its  bad  affects. 
Among  the  banks  of  New  York  City  the  reduction  of  cap- 
ital was  a  common  practice,  and  along  with  this  went  the 
reduction  of  surplus.  The  report  of  the  Commissioner  of 
Taxes  and  Assessments  of  New  York  City  for  1877  showed 
that  the  variation  in  the  assessments  upon  the  stockholders 
of  banks  was  responsible  for  the  failure  of  one  bank  with 
a  capital  of  $100,000,  the  abandonment  of  business  by 
two  banks  with  capitals  of  $600,000  each,  the  reduction 
of  capital  by  six  banks  to  the  extent  of  $3,950,000,  and 
the  establishment  of  one  bank  with  a  capital  of  $100,000. 
There  had  also  been  a  large  reduction  of  surplus  on  the 
part  of  several  banks  by  distribution  or  by  losses  in  bus- 
iness, pointed  out  the  report.  In  January,  1877,  the  Bank 
of  Commerce  sent  proxy  forms  to  stockholders  for  the 
purpose  of  obtaining  authority  to  reduce  the  capital  of 
$10,000,000  to  any  amount  not  less  than  half  of  this  un- 
less some  legislative  change  was  made  in  regard  to  tax- 
ation. This  consent  was  given  and  the  legislation  was 
not  forthcoming. 

The  reduction  of  banking  capital  in  New  York  City 
within  a  year  amounted  to  almost  $10,000,000.  The 
taxes  on  the  shareholders  in  the  New  York  City  banks 

"Governor  Robinson's  Message,   1877,   Senate   Documents,   1877, 
Vol.  1,  No.  2. 


THE  TAXATION  OF  BANKS  103 

in  1876  were  nearly  $12,000,000  more  than  in  1875  while 
the  tax  on  their  real  estate  amounted  to  over  $10,000,000. 
Under  such  conditions  it  is  no  wonder  that  capital  would 
be  reduced  and  surplus  distributed  if  this  would  bring  re- 
lief. It  was  possible  to  put  the  surplus  where  it  could  not 
be  so  easily  found  by  the  assessors.  Even  under  a  reduc- 
ed capital,  if  the  profits  remained  as  great  as  before,  the 
value  of  the  share  should  increase.  If,  then,  the  shares 
were  taxed  at  their  actual  value,  as  was  intended,  a  mere 
reduction  of  capital  would  have  little  effect  upon  tax. 
But  the  dividends  and  distributions  of  surplus  were  not 
always  reflected  in  the  value  of  the  shares.  Besides, 
there  were  wide  discrepancies  in  the  assessment  and  a  re- 
duction in  capital  often  meant  lower  tax.  It  was  hard 
for  an  assessor  to  assess  a  bank  with  a  capital  of  $50,000 
as  much  as  one  with  a  capital  of  $500,000.  The  nature 
of  the  banking  business  makes  a  large  capital  of  no  great 
importance.  If  large  deposits  can  be  secured  and  exten- 
sive credit  given  on  a  small  capital  and  surplus,  the  profits 
still  remain.  There  is  a  disadvantage,  however,  to  the 
public  in  that  the  security  of  the  bank  is  weakened. 

In  1877  Mr.  Elliott  C.  Cowdin  championed  a  bill  in 
the  Assembly  for  the  relief  of  the  banks.  In  a  speech  on 
April  11,  1877,  he  presented  many  facts  which  vividly 
portrayed  the  alleged  condition  of  the  New  York  banks. 
People  are  mistaken,  he  said,  when  they  think  national 
banks  are  the  pets  of  the  federal  government  and  should, 
therefore,  bear  heavy  taxes  imposed  by  the  state  and  mu- 
nicipal governments.  He  quoted  the  federal  comptroller 
as  declaring  the  tax  upon  national  bank  capital  relative- 
ly higher  than  upon  any  other  capital  in  the  country.  Not 
only  must  it  bear  state  taxation,  but  a  national  tax  as 
well.28  The  average  rate  of  taxation  on  the  capital  of 
all  the  national  banks  of  the  state  was  slightly  less  than 
three  per  cent.     A  comparison  of  a  few  cities  follows: 

a  National  Banks  by  the  law  of  1863  were  required  to  pay  three 
kinds  of  taxes  to  the  federal  government:  (1)  one  per  cent  an- 
nually upon  the  average  amount  of  notes  in  circulation ;  (2)  one 
half  of  one  per  cent  upon  deposits ;  (3)  they  were  required  to  keep 
a  reserve  of  25  per  cent  in  city  banks  and  15  per  cent  in  country 
banks.    They  could  not  use  the  reserve  yet  were  taxed  upon  it. 


104        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

New  York,  3.1  per  cent;  Philadelphia,  .5  per  cent;  Wash- 
ington, .3  per  cent.  Including  federal  taxes  the  rate  in 
New  York  City  went  to  5.1  per  cent  while  in  Abany  and 
Syracuse  it  was  more  than  6.5  per  cent.  Money  was 
being  loaned  on  call  at  this  period  at  about  three  per  cent 
while  notes  were  discounted  at  from  four  to  six  per  cent. 
A  study  of  the  values  of  personal  property  on  the  assess- 
ment rolls  in  New  York  city  shows  the  national  banks 
to  be  almost  forty  per  cent  of  the  whole. 

The  speaker  commented  upon  the  difficulties  of  meet- 
ing the  competition  of  foreign  bankers  who  did  not  have 
to  pay  the  tax,  and  upon  the  evils  of  reducing  capital 
and  surplus.  The  bill  before  the  legislature  sought  to 
secure  a  more  uniform  taxation  of  banking  capital  as 
compared  with  other  forms  of  capital.  It  met  defeat, 
however,  on  April  26  by  one  vote.  The  opposition  came 
chiefly  from  the  rural  districts.  The  New  York  Times29 
sought  to  excuse  the  rural  legislator  by  saying  the  "he 
probably  does  not  understand  in  the  sense  of  realizing 
comprehension  the  severity  and  injustice  of  the  present 
taxation ;  he  is  accustomed  to  the  complaint  of  inequality, 
and  expects  as  a  matter  of  course,  that  every  class  and 
every  interest  will  endeavor  to  escape  being  taxed." 

Thus  the  system  remained  unchanged  and  the  agita- 
tion against  it  continued.  Comptrollers,  state  assessors, 
bank  superintendents,  and  the  press  all  condemned  it. 
The  assessors  criticized  the  "vengeance"  with  which 
national  banks  were  taxed,  and  expressed  doubts  as  to 
wether  any  capital  could  bear  such  an  enormous  burden. 
The  national  banks  were  paying  thirty  per  cent  of  all  the 
taxes  upon  personal  property.30  The  Superintendent  of 
Banks,  in  his  reports  for  1878  and  187931  was  no  ^ess  bit- 
ter. He  emphasized  that  the  banks  were  taxed  upon  what 
they  had  and  upon  what  they  did  not  have;  upon  what 
they  owned  and  upon  what  they  owed. 

M  Editorial,  New  York  Times,  April  23,  1877. 

M  Annual  Report  New  York  State  Assessors,  1879.  Senate  Docu- 
ments, 1879,  Vol.  2,  No.  28. 

"Annual  Report  Superintendent  of  Banks,  Assembly  Documents 
1878,  Vol.  1,  No.  5;  1879,  Vol.  1.  No.  5. 


THE  TAXATION  OF  BANKS  105 

The  tax  was  a  war  tax,  he  said,  and  it  should  not  be 
continued.  As  an  evidence  of  the  difficulties  which  sur- 
rounded the  banking  business,  he  pointed  to  the  number 
of  banks  which  had  either  gone  out  of  business,  reduced 
capital,  or  suspended  dividends.  When  an  excessive  tax 
is  being  placed  upon  bank  shares  it  does  not  fall  upon 
the  richest  and  strongest  capitalists,  for  a  large  propor- 
tion of  bank  shares  are  held  by  minors,  estates,  etc. 
When  banks  are  excessively  taxed,  therefore,  these 
classes  must  bear  more  than  their  share  of  taxation.  The 
State  Assessors  showed  that  there  were  three  companies 
within  the  state  which,  if  taxed  as  national  banks  were 
taxed,  would  pay  all  of  the  state  tax.  Such  taxation, 
however,  would  be  considered  an  outrage  upon  the  rights 
of  property  and  relief  would  no  doubt  be  given  by  the 
courts.32 

That  all  this  dissatisfaction  was  not  merely  a  clamor 
stirred  up  by  the  banking  interests  and  that  real  hard- 
ships were  imposed  upon  the  banking  business,  seems 
clear.  It  had  not  been  the  practice  of  the  state  comp- 
trollers, the  state  assessors  or  the  bank  superintendents 
unjustly  to  champion  the  cause  of  corporations.  More 
frequently  have  they  recommended  measures  which  would 
bring  more  revenue  to  the  state.  But  we  find  all  these 
officers  decrying  the  injustice  to  banks  and  the  consequent 
evil  effects  upon  business  and  industry. 

Branches  of  foreign  banks  could  flourish  and  prosper 
besides  the  struggling  national  banks.  But  as  soon  as  a 
bill  passed  both  branches  of  the  legislature  to  tax  foreign 
banking  capital  to  the  same  extent  that  domestic  banks 
were  taxed,  the  representatives  of  the  Canadian  banks 
immediately  held  a  conference  and  took  measures  to  with- 
draw their  capital.  This  would  have  taken  some  thirty 
or  forty  million  dollars  from  the  loan  market  and  the 
commercial  public  became  so  aroused  and  exerted  such 
an  influence  that  the  bill  was  vetoed.  Even  such  a  lesson 
as  this  did  not  awaken  the  legislators  to  the  situation  with 
respect  to  home  capital.    That  the  capital  and  surplus  in- 

"  Annual  Report  New  York  State  Assessors,  Senate  Documents, 
1880,  Vol.  1,  No.  26. 


106        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

vested  in  the  banking  business  in  New  York  state,  especi- 
ally in  New  York  city,  actually  decreased,  and  that  this 
was  not  true  of  banking  capital  elsewhere  is  evident  from  a 
study  of  the  Pennsylvania  banks  of  the  same  period.  The 
accompanying  graphs  make  this  clear.     The  capital  of 


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THE  TAXATION  OF  BANKS 


107 


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the  New  York  city  national  banks  was  nearly  $75,000,000 
in  1865,  while  in  1885  lt  nad  fallen  to  $45,000,000  and 
by  1899  had  not  reached  $50,000,000.  The  national 
banks  of  the  whole  state  show  a  similar  tendency.  The 
amount  of  $113,000,000  was  invested  in  banking  capital 
in  1865,  about  $83,000,000  in  1885,  and  about  the  same 
hi  1899.  It  is  evident,  too,  that  the  heaviest  burden  was 
upon  the  banks  of  New  York  City,  for  the  curve  for  the 
national  banks  outside  of  the  city  shows  an  almost  con- 
stant amount  of  capital  invested.  That  the  national  banks 
were  hit  much  harder  than  the  other  banks  is  also  clear 
for,  with  the  exception  of  one  period,  there  was  not  much 
of  a  decrease  in  the  capital  of  other  banks,  but  rather  a 


108        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

gradual  rise.  In  Pennsylvania  there  was  a  gradual  in- 
crease in  national  bank  capital  from  $47,000,000  in  1865 
to  $62,000,000  in  1885  and  $70,000,000  in  1889.  This 
latter  amount  was  $5,000,000  less  than  for  the  two  pre- 
vious years.  The  other  set  of  graphs  shows  that  although 
surplus  was  not  reduced  in  similar  proportion,  yet  there 
was  a  period  in  New  York  when  it  diminshed.  As  a  whole 
the  amount  of  the  surplus  in  the  two  states  was  about  the 
same,  although  the  percentage  to  capital  was  much  less  in 
New  York  than  in  Pennsylvania.  We  may  therefore 
conclude  that  the  banks  were  not  unjustified  in  their  con- 
tention that  relief  was  needed. 

In  1879  a  ray  of  hope  came  to  the  banks.  A  stock- 
holder in  the  National  Albany  Exchange  Bank  made  ap- 
plication to  have  debts  deducted.  This  was  refused,  the 
state  courts  upholding  the  assessment.  He  carried  the 
case  to  the  United  States  Supreme  Court.33  The  court  gave 
the  opinion  that  the  provision  in  the  law  that  taxation  on 
the  snares  of  any  national  banking  association  should  not 
be  at  a  greater  rate  than  that  on  other  moneyed  capital 
in  the  hands  of  individuals  in  the  state,  had  reference  to 
the  entire  process  of  assessment  and  included  the  valua- 
tion of  the  shares  as  well  as  the  rate  charged  thereon. 
The  statute  of  a  state,  therefore,  which  established  a  mode 
of  assessment  by  which  such  shares  were  valued  higher 
in  proportion  to  their  real  value  than  moneyed  capital,  was 
in  conflict  with  the  law,  even  though  no  higher  tax  rate 
was  levied  on  such  valuation  than  on  that  of  other  mon- 
eyed capital.  The  statutes  of  New  York,  which  permit- 
ted one  to  deduct  his  just  debts  from  the  valuation  of  all 
his  peronal  property,  except  as  much  as  consisted  of  bank 
shares,  were  therfore  in  conflict  with  the  federal  statute. 
The  significant  point  in  the  decision  is  that  it  held  that 
Congress  had  in  mind  the  assessed  valuation  as  well  as 
the  so-called  rate  of  taxation.  The  state  courts  had  held 
if  the  rate  of  taxation  were  uniform  the  law  was  not 
violated. 

This  decision  did  away  with  that  part  of  the  interpre- 
tation of  the  law  of  1866  which  prevented  the  deduction 

"  People  vs  Weaver,  100  U.  S.,  539. 


THE  TAXATION  OF  BANKS  109 

of  debts  in  the  assessment  of  bank  shares.  In  view  of 
this  it  seemed  that  it  would  henceforth  be  impracticable 
to  collect  the  tax  as  a  whole  at  the  source.  The  decis- 
ion was  hailed  with  delight  by  the  banks.  One  of  the  New 
York  City  tax  commissioners  expressed  the  opinion  that 
the  tax  paid  by  the  New  York  City  banks  would  be  re- 
duced by  $1,550,000,  which  would  necessitate  an  increas- 
ed tax  on  real  estate. 

The  next  revision  of  the  state  tax  on  banks  was  a 
direct  consequence  of  this  decision.  The  new  statute,34 
enacted  in  1880,  was  in  general  like  the  law  of  1866, 
except  that  it  contained  the  additional  phrase,  "but  in  the 
assessment  each  stockholder  shall  be  allowed  all  the  de- 
ductions and  exemptions  allowed  by  law  in  assessing  the 
value  of  other  taxable  personal  property  owned  by  indi- 
vidual citizens  of  the  state." 

The  relief  given  by  this  law,  however,  was  less  than 
had  been  expected.  The  law  provided  as  before  that  state 
and  national  banks  should  be  assessed  and  taxed  in  the 
same  manner,  but  this  did  not  provide  improved  assess- 
ment machinery,  and  so  did  not  insure  fair  and  equitable 
valuations.  Even  if  there  had  been  an  exact  uniformity 
in  the  assessment  of  state  and  national  banks,  there  would 
not  have  been  equality  of  burden,  for  the  latter  had  also 
to  pay  taxes  to  the  federal  government.  There  was  some 
agitation  in  1880  to  place  a  tax  of  one-half  of  one  per 
cent  on  the  average  deposits  in  state  banks  and  a  bill  in- 
tended to  accomplish  this  was  introduced  into  the  legis- 
lature, but  nothing  came  of  it. 

No  doubt  banking  capital  continued  to  bear  a  higher 
tax  than  other  capital,  because  the  assessors  could  easily 
place  it  upon  the  assessment  rolls,  while  much  of  the  other 
personal  property  could  easily  be  hidden.  Moreover,  a 
difficulty  was  encountered  in  the  assessment  of  shares 
where  the  bank  was  located.  The  banks  sometimes  re- 
fused to  pay  the  tax,  and  so  impracticable  was  it  to  col- 
lect taxes  from  non-residents,  that  in  some  places  only 
resident  share  holders  were  assessed.     In  different  dis- 

94  New  York  Statutes,  1880,  Chap.  596. 


110        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

tricts  the  shares  continued  to  be  assessed  at  from  forty  to 
one  hundred  and  twenty  per  cent  of  par  value. 

The  decision  with  regard  to  the  deduction  of  debts  en- 
couraged the  banks  to  bring  a  number  of  new  cases  be- 
fore the  courts.  In  the  case  of  McMahon  vs  Palmer  the 
court  held35  that  the  exemption  from  taxation  by  state 
law  of  some  moneyed  capital  did  not  necessarily  invali- 
date a  statute  authorizing  an  assessment  upon  national 
bank  shares.  The  fact  that  some  corporations  and  some 
personal  property  were  subject  to  a  lower  rate  of  taxa- 
tion than  that  levied  upon  banks  would  not  in  itself  vitiate 
the  law  imposing  taxes  upon  bank  shares  unless  it  appear- 
ed to  be  the  clear  legislative  intent  to  effect  thereby  dis- 
crimination against  them.  Neither  could  a  receiver  bring 
action  to  have  an  assessment  reduced  since  none  but  the 
share  holders  had  any  interest  in  the  matter  of  taxation. 
Unless  they  appeared  before  the  commissioners  at  the 
time  specified  in  the  law  the  action  could  not  be  subse- 
quently reviewed  by  the  courts.36 

Until  this  time  the  term  "moneyed  capital"  in  the  hands 
of  individuals,"  so  frequently  used  by  the  statutes  and 
courts,  had  been  only  partially  defined.  It  remained  for 
the  United  States  Supreme  Court37  to  do  this  in  1887, 
and  its  opinion  was  anything  but  favorable  for  the  con- 
tentions of  the  bank.  It  held  that  the  main  purpose  of 
Congress  in  fixing  limits  to  the  state  taxation  of  the 
shares  of  national  banks  was  to  render  it  impossible  for 
the  state  to  create  and  foster  an  unfriendly  competition 
by  favoring  institutions  or  individuals  carrying  on  similar 
business  or  operations  and  investments  of  a  like  character. 
"Moneyed  capital,"  then,  embraced  capital  employed  in 
national  banks  and  capital  employed  by  individuals  when 
the  object  of  their  business  was  the  making  of  profit  by 
the  use  of  their  moneyed  capital  as  money — as  is  in  the 
opinion  of  the  court,  a  characteristic  of  banking.  It  did 
not  include,  however,  moneyed  capital  when  in  the  hands 
of  a  corporation,  even  if  its  business  be  such  as  to  make 

83  McMahon  vs  Palmer,  102  N.  Y.f  176;  affirmed  133  U.  S.,  669. 
34  So  held  by  the  Court  in  People  vs  Wall  Street  Bank,  39  Hun,  525. 
"Mercantile  Bank  vs  New  York,  121  U.  S.,  138. 


THE  TAXATION  OF  BANKS  111 

its  shares  moneyed  capital  when  in  the  hands  of  individ- 
uals or  if  it  invested  its  capital  in  secureties  payable  in 
money. 

It  further  held  that  the  mode  of  taxation  adopted  by 
the  state  of  New  York  in  reference  to  corporations,  ex- 
cluding trust  companies  and  savings  banks,  did  not  oper- 
ate in  such  a  way  as  to  tax  the  shares  of  national  banks 
at  a  higher  rate  than  that  imposed  upon  other  moneyed 
capital  in  the  hands  of  individual  citizens.  Although 
trust  companies  created  under  the  laws  of  New  York 
were  not  banks  in  the  commercial  sense  of  the  word,  yet 
the  court  held  that  the  shares  of  such  companies  were 
moneyed  capital  in  the  hands  of  individuals.  Since,  how- 
ever, these  companies  were  taxed  upon  the  value  of  their 
capital  stock,  with  deductions  on  account  of  the  property 
in  which  their  capital  was  invested,  and  were  additionally 
taxed  upon  their  income  through  the  franchise  tax,  the 
court  did  not  consider  that  the  rate  of  taxation  thus  im- 
posed was  less  than  upon  the  shares  in  national  banks. 
Deposits  in  savings  banks,  it  held,  were  exempted  from 
state  taxation  for  just  reasons,  and  as  the  exemption  did 
not  operate  as  an  unfriendly  discrimination  against  in- 
vestments in  national  bank  shares  it  could  not  affect  the 
rule  for  the  taxation  of  the  latter. 

Here  we  have  set  forth  in  no  uncertain  langjage  the 
5 talus  of  bank  shares.  Only  such  stocks  of  corporations 
and  investments  of  capital  as  from  the  nature  of  the  busi- 
ness engaged  in,  competed  with  national  banks,  were  to 
be  considered  moneyed  capital.  Shares  of  trust  compan- 
ies were  moneyed  capital  but  there  was  no  discrimination 
in  the  fact  that  no  tax  was  placed  upon  such  shares.  We 
have  noted  that  it  was  upon  a  similar  point  in  regard  to 
state  banks  that  the  law  of  1865  had  been  declared  un- 
constitutional. Capital  invested  in  national  bank  stccV 
was  taxed  upon  its  value  less  a  deduction  for  real  estate 
and  for  debts  (where  this  last  could  be  effected,)  but  with 
no  deduction  for  amounts  invested  in  United  States  se- 
cureties. Capital  in  trust  companies  was  taxed  under  the 
old  law  of  1857,  and  the  basis  was  capital  not  invested  in 
United  States  secureties  or  other  non-taxable  property. 


1 12        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

That  some  sort  of  discrimination  still  existed  is  evident, 
but  the  courts  refused  to  recognize  it  as  objectionable 
under  the  existing  laws,  so  the  only  thing  left  to  the  banks 
was  to  move  the  legislature  to  action — an  accomplishment 
which  experience  had  proved  to  be  no  easy  task. 

For  some  time,  however,  the  attempt  to  obtain  relief 
went  no  further  than  remonstrances.  In  a  report  to  the 
legislature  in  1893,38  Messrs.  Charles  A.  Collin  and  J. 
Newton  Fiero,  counsel  appointed  to  revise  the  tax  laws, 
pointed  out  that  banks  were  complaining  with  apparent 
justice  that  they  were  overtaxed  as  compared  with  other 
corporations.  They  attributed  this  to  the  relatively  effi- 
cient machinery  for  bank  taxation,  and  suggested  a  uni- 
form method  taxing  all  corporations.  The  New  York 
Financier,  in  1906,39  told  of  the  lack  of  uniformity  in 
bank  taxation  and  its  results.  A  letter  from  President 
Perkins  of  the  Bank  of  America  to  the  stockholders,  ex- 
plaining a  proposed  reduction  of  capital,  said :  "The  re- 
duction is  proposed  because  the  bank  is  receiving  very  low 
rates  of  interest,  while  it  is  paying  in  taxes  a  sum  approx- 
imating $80,000,  of  which  about  $30,000  can  be  saved 
when  the  reduction  of  capital  is  carried  into  effect."  Had 
this  bank  been  taxed  in  the  same  manner  as  trust  com- 
panies the  dividends  could  have  been  from  one  to  two 
per  cent  higher. 

The  special  tax  commission  of  1900  suggested  a  levy 
of  one  per  cent  upon  the  stock  of  national  banks,  state 
banks,  and  trust  companies.  The  value  of  the  shares  was 
to  be  ascertained  by  adding  together  the  capital  stock, 
surplus  and  undivided  profits  and  deducting  the  assessed 
value  of  the  real  estate  which  continued  to  be  assessed 
locally.  This,  they  thought,  would  eliminate  the  differ- 
ences in  the  assessment  of  banking  capital,  and  afford 
substantial  justice  to  all.40  The  Nation  in  commenting  up- 
on this  report  said  that  it  suggested  "so  just  and  equitable 
as  well   as   so   judicious   and  convenient  a   solution   of 

"Assembly  Documents,  1893,  Vol.  9,  No.  54 
"Quoted  in  Public  Opnion,  Dec.  31,  1896,  Vol.  21. 
**  Report  of   Special   Tax   Commission,    1900,   Senate   Documents, 
1900.    Vol.  1,  No.  7. 


THE  TAXATION  OF  BANKS  113 

a  perplexing  problem  that  it  ought  to  be  accepted  with- 
out contest  by  banks  and  trust  companies  alike.  "41  The 
recommendation,  however,  brought  no  results  at  this  ses- 
sion of  the  legislature. 

In  1 90 1  Governor  Odell  in  his  message  made  practical- 
ly the  same  recommendations.42  The  legislature  took  up 
the  question  and  at  first  attempted  to  enact  a  law  placing 
a  franchise  tax  of  one  per  cent  upon  all  banks  and  trust 
companies  in  addition  to  the  taxes  already  borne.  A  gen- 
eral protest  arose,  not  only  from  bankers  but  from  other 
business  men  as  well.  This  bill  failed,  but  one  was  enact- 
ed43 embodying  substantially  the  suggestions  of  the  gov- 
ernor and  the  special  tax  commission  and  which  fixes  the 
present  basis  of  bank  taxation.  Every  bank  has  to  make 
a  report  to  the  assessors  under  penalty  of  $100  plus  $10 
for  every  day  of  delay.  The  assessment  cannot  be  at 
a  greater  rate  than  upon  other  moneyed  capital.  The 
value  of  each  share  is  to  be  fixed  by  adding  together  the 
amount  of  the  capital  stock,  surplus  and  undivided  pro- 
fits, and  dividing  the  result  by  the  number  of  outstanding 
shares.  The  rate  of  the  tax  is  one  per  cent  upon  the  value 
so  determined.  Shareholders  are  entitled  to  no  deduction 
from  the  taxable  value  of  their  shares  because  of  their 
personal  indebtedness  or  any  other  reason.  This  is  in 
lieu  of  all  other  taxes  for  state,  county  or  local  purposes 
except  the  local  tax  upon  real  estate.  On  or  before  De- 
cember 1  of  each  year  the  assessors  have  to  determine 
the  value  of  bank  shares,  and  mail  their  findings  to  the 
bank  officer,  a  certified  copy  being  sent  to  the  county 
treasurer.  The  bank  collects  the  tax  due  upon  its  shares 
paying  it  to  the  county  treasurer  within  fifteen  days  after 
it  receives  the  statemen  of  assessment  and  tax.  A  pen- 
alty of  $100  is  attached  for  every  day  of  delay  in  pay- 
ment. In  1903  it  was  enacted  that  the  value  of  a  share 
for  taxation  of  a  bank  in  liquidation  would  be  the  actual 
assets  divided  by  the  number  of  outstanding  shares.44 

"TheNation,  Feb.  1,  1900.  Vol.  70. 

0  Governor  Odell,  Message,  Senate  Documents,  1901,  Vol.  1,  No.  2. 

»  New  York  Statutes,  1901,  Chap.  550. 

**  New  York  Statutes,  1903,  Chap.  267. 


1 14         DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

Such  is  the  accomplishment  after  thirty-five  years  of 
struggle  and  discussion.  Since  this  system  has  been  in- 
augurated we  have  had  little  complaint  and  this  has  been 
almost  wholly  from  interests  located  without  the  state 
owning  shares  in  New  York  banks.  Under  the  old 
scheme  they  often  escaped  since  the  banks  refused  to  pay 
the  tax  and  the  non-resident  stockholders  could  not  be 
reached  by  the  officials.  The  court  held  that  the  statutes 
could  not  impose  a  personal  liability  upon  a  non-resident 
taxpayer,  but  could  only  make  the  property  liable  for  the 
tax.45  The  court  also  decided  that  no  deductions  for  real 
estate  Were  to  be  allowed  and  that  this  did  not  invalidate 
the  law.46  Certainty,  equality,  and  uniformity  have  in 
a  large  measure  been  secured  for  all  institutions  doing  a 
banking  business.  The  simple  rule  which  is  used  in  the 
determination  of  the  tax  does  away  with  the  use  of  any 
discretion  on  the  part  of  the  assessors,  which  is  in  itself 
a  commendable  thing.  While  some  have  pointed  out  that 
the  tax  on  banking  capital  is  lower  than  the  tax  upon  oth- 
er capital  and  have  asked  for  an  increase  in  the  rate,  and 
others  have  advocated  a  lower  rate,  the  system  as  a  whole 
has  proved  generally  satisfactory.  Few  states  have  a 
system  for  which  so  much   can  be  said  in  its  favor.47 

Some  objections  have  been  made  because  the  value  of 
the  real  estate  is  not  deducted  when  the  assessment  of 
capital  is  made.  It  is  claimed  that  real  estate  is  thus  twice 
taxed.  By  carrying  out  the  scheme  as  it  is  at  present, 
however,  the  administration  is  simpler.     Besides  it  is  not 

45  City  of  New  York  vs  McLean,  170  N.  Y.,  374. 
49  Matter  of  the  First  National  Bank  of  Ossining,  182  N.  Y.,  460 
47  The  special  tax  commission  of  1907  thought  the  rate  was  too 
low.  It  was  of  the  opinion  that  it  should  be  increased  to  one  and 
one-half  per  cent,  and  that  the  assessed  value  of  the  real  estate 
should  be  deducted  from  the  capital  stock.  It  also  recommended 
that  one-third  of  the  tax  should  go  to  the  state.  Mr.  Thos.  B.  Paton, 
general  counsel  for  the  American  Bankers'  Association  said  before 
the  National  Tax  Association  at  Buffalo,  1913,  that  "there  are  a 
few  states  in  which  the  system  of  bank  taxation  is  now  satisfactory 
from  the  banking  standpoint,  and  among  these  is  the  state  of  New 
York."  The  other  states  which  he  considers  as  having  a  satisfac- 
tory system  are  New  Jersey,  Washington,  and  Indiana,  while  that 
of  Georgia,  Minnesota,  Iowa,  and  Illinois  is  only  partially  satisfac- 
tory. 


THE  TAXATION  OF  BANKS  115 

''double  taxation"  that  necessarily  works  injustice;  it  is 
rather  the  equity  of  the  total  tax  burden  that  is  important. 
So  long,  then,  as  the  rate  on  the  capital  is  low  enough 
that  it  does  no  make  the  total  tax  excessive,  no  injustice 
is  done  by  not  deducting  the  value  of  the  real  estate. 

The  rate  at  which  capital  invested  in  banks  should  be 
taxed  is  a  question  which  has  been  much  discussed.  Some 
have  advocated  a  high  tax  while  others  would  exempt  it 
entirely.  The  one  class  looks  upon  banks  as  favored 
creatures  of  the  government,  while  the  other  looks  upon 
them  as  essential  to  business  prosperity  and  seeks  to  es- 
tablish them  more  extensively.  While  all  sorts  of  produc- 
tive capital  might  be  more  remunerative  if  untaxed,  yet 
the  state  must  have  revenue  and  capital  must  bear  a  part 
of  the  burden.  The  nature  of  the  business  should  of 
course  be  given  some  weight  in  determining  the  tax 
placed  upon  it.  Some  undesirable  forms  of  enterprise  we 
tax  severly  as  a  limiting  or  prohibitory  measure.  Such 
are  the  taxes  upon  the  circulation  of  state  bank  notes,  and 
the  numerous  taxes  and  licenses  placed  upon  the  liquor 
business.  The  earlier  taxes  placed  upon  New  York 
banks,  at  least  in  the  way  in  which  they  operated,  seem- 
ed in  their  effect  much  like  sumptuary  taxes.  If  a  cor- 
porate franchise  confers  some  valuable  privileges,  such 
as  monopoly,  this  may  very  often  properly  bear  a  higher 
tax  than  one  which  gives  no  special  privilege. 

The  banking  business  is  not,  however,  of  such  a  nature 
as  to  suggest  any  clear  reason  why  it  should  bear  either 
especially  high  or  especially  low  taxes.  The  granting  of 
franchise  to  such  institutions  in  no  sense  gives  them  a 
monopoly,  or  increases  their  earning  power.  In  fact  the 
use  of  the  corporate  form  really  increases  the  possibility 
of  competition,  for  persons  of  small  means  can  become 
shareholders.  Moreover,  banks  render  a  necessary  serv- 
ice and  are  essential  to  business  operations.  By  furnish- 
ing credit  when  needed  they  help  to  develop  productive 
business  enterprise  and  thus  enlarge  the  basis  of  taxation. 
If  banks  are  unduly  burdened  banking  facilities  will  be 
correspondingly  lessened.  It  can  at  least  be  held,  there- 
fore, that  banks  should  not  be  taxed  so  much  as  appreci- 


116        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ably  to  hinder  capital  from  seeking  that  form  of  invest- 
ment. 

The  taxation  of  bank  deposits  is  another  much  discuss- 
ed problem.  Upon  bank  deposits  is  based  the  system  by 
which  goods  are  in  a  large  measure  exchanged.  A  tax 
that  would  seriously  affect  the  amount  of  deposits,  thus 
affecting  this  form  of  bank  credit,  would  no  doubt  be  a 
handicap  to  business  transactions.  Deposits,  moreover, 
as  shown  by  the  books  of  a  bank,  are  liabilities  which  in 
a  large  part  merely  offset  loans  or  discounts  on  the  other 
side  of  the  account,  and  are  only  in  small  part  balanced 
by  cash.  The  real  deposit  in  these  cases  is  credit,  and 
this  is  secured  because  there  is  some  asset  in  the  hand  of 
the  depositor  which  is  presumably  taxed  under  the  prop- 
erty tax.  The  same  is  true  of  the  actual  cash  deposits 
which,  of  course,  are  comparatively  small  in  amount. 
They  are  liabilities  of  the  bank  and  assets  of  the  depositor. 
Under  the  present  system  they  are  presumably  taxed  to 
the  depositor.  No  doubt  much  of  the  deposits  escape  the 
assessor,  yet  the  same  may  be  said  for  other  classes  of 
personal  property.  '  The  suggestion,  however,  that  cash 
deposits  be  taxed  to  the  bank  and  the  tax  shifted  to  the  de- 
positor through  a  lower  rate  of  interest  is  impracticable 
since  it  is  impossible  to  differentiate  this  kind  of  deposits. 
The  deposit  system  is  not  merely  one  of  convenience,  but 
one  which  in  a  special  way,  it  is  argued,  redounds  favor- 
ably to  the  bank.  If  liberal  accommodation  is  to  be  ob- 
tained by  the  borrower  he  is  expected  to  keep  a  corres- 
pondingly liberal  deposit  with  the  bank.  This  scheme  of 
finance  permits  the  bank  to  charge  a  higher  rate  of  inter- 
est than  what  appears  on  the  face  of  the  transaction. 
Suppose  a  firm  nominally  borrows  $25,000  at  seven  per 
cent  but  that  only  $20,000  are  drawn  out.  In  this  case 
the  rate  of  interest  on  the  actual  loan  would  be  nearly 
nine  per  cent.  By  such  transactions  the  profits  of  the 
bank  are  no  doubt  increased.  On  the  other  hand,  how- 
ever, the  whole  of  the  bank's  resources  are  not  product- 
ive. In  order  to  carry  on  credit  transactions  a  safe  re- 
serve must  be  kept  and  the  minimum  is  often  fixed  by  law. 
Their  gains,  therefore,  from  credit  transactions  are  to 


THE  TAXATION  OF  BANKS  117 

some  extent  counterbalanced  by  the  losses  on  their  re- 
serve. Because  then  of  the  nature  and  ownership  of  the 
deposits,  under  the  present  sytem  of  taxation,  there  seems 
to  be  little  justification  for  taxing  them  to  the  bank  in  ad- 
dition to  the  propery  tax  upon  the  owner. 

TAXATION  OF  SAVINGS  BANKS  AND  TRUST  COMPANIES 

The  statuatory  and  case  law  with  respect  to  the  taxa- 
tion of  savings  banks  has  had  an  entirely  different  his- 
tory. By  the  provisions  of  the  law  of  185748  the  ex- 
penses of  the  banking  department,  incurred  because  of 
the  supervision  of  savings  banks,  were  to  be  borne  by 
them  in  proportion  to  the  amount  of  deposits  held.  In 
186749  this  was  changed  so  that  each  paid  five  dollars, 
the  residue  of  the  expense  being  divided  in  proportion  to 
deposits. 

In  186650  the  privileges  and  franchises  granted  by  the 
legislature  of  the  state  to  savings  banks  and  other  insti- 
tutions for  savings  were  declared  to  be  personal  property 
and  liable  to  taxation.  They  were  to  be  taxed  in  the 
town  or  ward  where  they  were  located  to  an  amount  not 
exceeding  the  gross  sum  of  the  surplus  earned  and  in 
possession  of  the  institutions.  The  officers  were  to  be  ex- 
amined under  oath  by  the  assessors  as  to  the  amount  of 
such  surplus  and  the  property  was  liable  to  seizure  and  sale 
for  the  payment  of  taxes  assessed  for  privileges  and  fran- 
chises. A  year  later  52  a  law  provided  that  the  gross  sum 
of  surplus  earned  be  diminished,  for  purposes  of  taxation, 
by  the  amount  of  the  surplus  invested  in  United  States 
securities.  The  law  of  185753  declared  that  deposits  in 
savings  banks  were  not  taxable,  except  for  the  real  estate 
and  stocks,  which  were  owned  by  the  bank.  In  189654 
the  "deposits  in  any  bank  for  savings  which  were  due  to 
the  depositors,"  were  declared  exempt  from  taxation.    In 

48  New  York  Statutes,  1857,  Chap.  136. 

49  New  York  Statutes,  1867,  Chap.  136. 
90  New  York  Statutes,  1866,  Chap.  761. 
"New  York  Statutes,  1867,  Chap.  861. 
58  New  York  Statutes,  1857,  Chap.  456. 
54  New  York  Statutes,  1896,  Chap.  117. 


118        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

1 90 1  an  extra  tax  of  one  per  cent  on  the  par  value  of 
their  surplus  and  undivided  earnings  was  assessed,55  and 
in  1914  every  savings  and  loan  association  was  classed 
as  an  institution  for  savings,  and  neither  they  nor  their 
property  was  to  be  assessed  under  any  law  that  exempted 
savings  banks.56 

The  amendment  of  1867  with  regard  to  deductions  of 
surplus  was  evidently  not  due  to  judicial  action.  In  the 
same  year  a  case  involving  the  deduction  of  the  amount 
invested  in  United  States  secureties  came  before  the 
court.57  The  decision  was,  that  where  a  tax  is  declared 
upon  franchises  and  privileges,  it  is  not  to  be  deemed 
illegal  because  a  corporation  employs  the  bonds  of  the 
United  States  as  one  of  the  means  of  accomplishing  its 
purposes.  The  tax  was  upon  the  franchise,  and  it  was 
unimportant  what  use  the  corporation  made  of  it.  More- 
over, the  state  granted  the  franchise  and  could  annex  any 
conditions  to  its  enjoyment  which  it  chose. 

The  court  also  laid  down  a  rule  for  valuing  the  surplus 
for  the  purpose  of  fixing  the  franchise  tax.  The  Com- 
troller  must  appraise  the  securities  in  which  the  surplus  is 
invested  at  market  value  when  this  is  below  par,  and  must 
never  appraise  it  above  par  even  though  the  market  value 
may  be  above  par.58  The  court  also  decided  that  when  a 
savings  bank  was  being  assessed  upon  shares  of  other 
banks  which  it  owned,  both  its  debts  and  the  amount  in- 
vested in  United  States  securities  should  be  deducted.59 

Although  some  difficulty  has  arisen  in  determining  the 
value  of  the  surplus,  the  question  which  has  overshadowed 
all  others  in  point  of  importance  is  whether  deposits  in 
savings  banks  should  be  subject  to  any  tax.  In  the  earlier 
period  total  exemption  was  pretty  generally  advocated. 

"New  York  Statutes,  1901,  Chap.  117. 

M  New  York  Statutes,  1914,  Chap.  369. 

67  Monroe  County  Savings  Bank  vs  City  of  Rochester,  37  N.  Y., 
365. 

88  Bank  for  Savings  vs  Miller,  177  N.  Y.,  461.  This  rule  is  prac- 
tically the  same  as  laid  down  in  the  statute  (1892,  Chap.  689)  for 
determining  the  amount  of  surplus  which  a  bank  had.  Its  surplus 
could  not  exceed  15  per  cent  of  its  deposits. 

09  Bridgeport  Savings  Bank  vs  Barker,  154  N.  Y.,  128. 


THB  TAXATION  OF  BANKS  1 19 

More  recently,  however,  an  increasing  number  of  writers 
on  taxation  are  in  favor  of  some  form  of  taxation.  The 
position  of  deposits  in  savings  banks  differs  from  that  of 
deposits  in  commercial  banks.  Savings  banks  were  es- 
tablished for  the  small  depositor — for  the  one  whose  sav- 
ings are  small,  and  the  kind  of  business  done  by  the  bank 
is  limited  in  many  ways. 

While  the  importance  of  savings  banks  accounts  is  di- 
minishing,60 and  the  average  per  depositor  is  small,  the 
total  may  aggregate  many  millions  of  dollars.  Atttempts 
to  tax  deposits  have  been  met  with  the  objection  that  this 
is  to  tax  the  poor  and  industrious,  the  widows  and  or- 
phans. While  the  average  deposit  is  small,  yet  quite  a 
large  number  of  wealthy  men  use  the  savings  banks.  The 
maximum  individual  deposit  is  $3000,  but  this  has  been 
evaded  by  the  depositor  using  different  banks  or  making 
his  deposits  under  different  names.  The  special  commis- 
sion in  190761  called  attention  to  a  case  where,  in  admin- 
istering an  estate  in  one  of  the  interior  counties,  the  court 
found  deposits  in  every  savings  bank  in  the  state  between 
and  including  Buffalo  and  Albany.  In  another  case  an 
estate  was  appraised  for  the  inheritance  tax,  and  every 
cent  of  the  $65,000  was  found  in  savings  banks.  It  fur- 
ther pointed  out  the  large  number  of  cases  where  de- 
posits have  been  made  under  different  modifications  of 
the  same  name  and  under  the  names  of  different  members 
of  the  same  family.  By  these  methods,  then,  the  purpose 
of  the  law,  in  fostering  savings  among  the  laboring  class- 
es and  the  poor,  has  been  abused.  For  this  reason  the 
taxation  of  savings  accounts  has  been  advocated. 

The  commission  to  which  we  have  just  referred 
thought  it  best  to  make  the  maximum  amount  exempted 
from  tax  $1000.  This  might  result,  it  thought,  in  limit- 
ing the  deposits  in  any  one  bank  by  any  one  person  to 
$1000  and  hence  virtually  exempt  all  deposits  from  taxa- 
tion.   Governor  Dix,  in  his  message  of  191 2,  pointed  out 

60  The  decline  in  savings  deposits  can  probably  be  accounted  for 
by  the  spread  of  investment  intelligence  among  individuals  together 
with  the  increased  ease  of  securing  suitable  securities. 

"Senate  Documents,  1907,  Vol.  5,  No.  11. 


120        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

the  violation  of  the  spirit  of  the  law  whereby  millions  of 
dollars  sought  the  savings  banks  as  an  investment;  and 
asked  for  some  method  of  reaching  this  class  of  capital 
which  would  not  burden  the  small  depositor. 

It  does  not  seem  that  fixing  $1000  as  a  maximum  tax- 
exempt  deposit  would  accomplish  the  desired  end.  If 
persons  use  a  number  of  banks  and  a  number  of  di  fife  rent 
names  under  which  to  make  deposits  when  the  exemption 
is  $3000  there  is  no  reason  to  suppose  that  the  practice 
would  be  stopped  with  a  $1000  maximum  even  though 
it  might  be  somewhat  lessened.  One  would  have  to  pat- 
ronize a  few  more  banks  or  use  a  few  more  names,  with 
evasion  continuing  much  as  before. 

We  would  not  penalize  small  savings,  but  it  is  doubtful 
whether  a  moderate  tax  upon  deposits  would  have  this 
effect  Even  if  it  should  mean  a  lower  rate  of  interest, 
it  would  work  little  hardship,  since  the  tax  would  only 
amount  to  one  or  two  dollars  and  this  would  be  the  only 
tax  that  many  of  the  depositors  would  pay.  The  opposi- 
tion to  such  a  tax  has  probably  not  come  in  large  measure 
from  the  small  depositor,  but  has  been  invoked  in  his 
name  by  those  who  have  used  the  banks  for  larger  invest- 
ment. The  man  whose  motive  is  saving  would  not  often  be 
induced  to  give  it  up  because  of  a  small  tax.  Because, 
then,  of  the  amount  of  deposits  in  the  savings  banks 
($1,660,564,190.73  in  1912),  the  negligible  burden  upon 
the  small  depositor  and  the  development  of  the  investment 
feature,  there  can  be  little  reason  for  opposing  a  small 
tax  upon  savings  bank  deposits. 

Trust  companies  have  also  been  treated  differently 
from  other  banks.  In  187462  they  were  placed  under  the 
banking  department,  and  were  to  be  assessd  their  proper 
proportion  of  the  expense  of  the  department.  By  the  law 
of  1 90 163  every  trust  company  organized  or  authorized 
to  do  a  trust  business  under  general  or  special  laws  of  the 
state  was  to  pay  an  annual  tax  for  state  purposes.  This 
tax  is  for  the  privilege  of  exercising  its  corporate  fran- 
chise or  carrying  on  its  business  in  an  organized  capacity. 

82  New  York  Statutes,  1874.  Chap.  324. 
'"New  York  Statutes,  1901,  Chap.  132. 


THE  TAXATION  OF  BANKS  121 

The  tax  is  one  per  cent  on  capital  stock,  surplus  and  un- 
divided profits.  This  is  in  lieu  of  all  other  taxes,  except 
the  organization  tax  and  the  owners  of  the  shares  are 
not  taxed  upon  them.  Other  banks  are  taxed  in  the  same 
way,  but  in  the  case  of  trust  companies,  there  are  no  fed- 
eral statutes  to  make  confusion.  Before  this  law  was  en- 
acted trust  companies  were  lightly  taxed  and  banks  com- 
plained of  the  descrimination.  Since  they  have  been  put 
on  the  same  basis  the  banks  are  satisfied,  and  there  has 
been  very  little  complaint  from  the  trust  companies.  As 
they  are  in  direct  competition  with  banks  in  many  ways 
it  is  but  just  that  they  should  be  taxed  in  the  same  man- 
ner. 


CHAPTER   VII 

TAXATION   OF   RAILROADS  AND  OTHER    PUBLIC 
SERVICE  CORPORATIONS 

Public  service  corporations  furnish  one  of  the  most 
complex  problems  of  taxation.  This  is  due  to  different 
causes.  The  legislature  at  an  early  date  divided  public 
utilities  into  classes  each  of  which  was  taxed  differently. 
This  system  still  continues.  The  problem  has  been  further 
complicated  by  Federal  laws,  and  in  the  apportioning  of 
state  and  local  revenues. 

For  many  years  the  basis  of  public  utility  taxation  was 
the  general  tax  law.  Concessions,  we  have  pointed  out, 
in  the  form  of  commutations  and  exemptions  were  made 
to  turnpike  companies  and  bridge  companies.1  Leniency 
was  also  shown  to  gas  companies.  In  1848  the  state  gave 
municipal  authorities  power  to  exempt  any  such  company 
from  taxation  of  personal  property  for  a  period  not  to  ex- 
ceed three  years  from  its  organization.2  Not  only  was 
leniency  shown  to  individuals  and  companies  undertaking 
public  utility  enterprises,  but  the  state  itself  undertook 
many  projects.  State  activity  was  especially  marked  in 
building  canals.3  These  canals  were  a  source  of  revenue, 
and  railroad  competition  was  at  first  looked  upon  with 
disfavor.  A  law  enacted  in  1848  stated  than  any  road 
paralleling  or  nearly  paralleling  any  canal  of  the  state, 
and  within  thirty  miles  of  it,  would  be  considered  as  di- 
verting freight  business  from  the  canals.  Because  of  this 
the  same  state  tolls  that  would  have  been  paid  had  the 
property  been  transported  by  canal  were  to  be  paid  by  the 

1  Chapter  I,  p.  13. 

2  New  York  Statutes,  1848,  Chap.  37. 

8  Don  Sowers,  Financial  History  of  New  York  State   (New  York 
1914)  gives  a  good  account  of  the  expenditure  of  public  funds. 

122 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  123 

railroad.4     After  1851,  however,  railroads  were  relieved 
from  the  duty  of  paying  tolls.5 

The  attempt  to  assess  railroads  under  the  general  tax 
law  soon  led  to  litigation.  The  Mohawk  and  Hudson 
Railroad  Company,  in  1834,  resented  the  attempt  to  tax 
all  its  capital  as  personal  estate.  In  court  the  chancellor 
gave  the  opinion  that  a  railroad  was  not  to  be  assessed, 
as  personal  estate,  upon  the  part  of  its  capital  invested  in 
lands.  In  the  same  category  with  land  he  placed  the  rails 
and  other  fixtures  of  the  system.  Such  property,  he  held, 
was  to  be  taxed  as  real  estate  at  its  actual  value,  while 
capital  stock  not  so  invested  was  to  be  taxed  as  personal 
property  at  the  location  of  the  principal  office.6  This 
decision  proved  but  a  stepping  stone  to  further  difficul- 
ties. Real  estate,  it  held,  was  to  be  assessed  at  actual 
value  but  it  soon  became  apparent  that  actual  value  was 
a  very  indefinite  term.  Was  the  real  esate  to  be  consider- 
ed as  isolated  and  assessed  on  the  same  basis  as  other 
property  in  the  district,  or  was  it  to  be  taken  as  a  part  of 
the  unified  system?  In  assessing  one  road  the  assessors 
estimated  the  value  of  the  entire  road,  taking  into  con- 
sideration not  only  the  physical  property  but  earnings  as 
well.  The  value  for  the  district  was  then  determined  by 
taking  such  proportion  of  this  entire  valuation  as  the 
length  of  road  in  the  district  bore  to  the  entire  length. 
The  value  for  the  district,  by  this  method,  amounted  to 
about  $250,000,  whereas  the  value  of  the  local  property, 
taken  by  itself,  was  found  to  be  about  $60,000.  The 
Supreme  Court  upheld  the  company  in  their  refusal  to 
accept  the  assessment.  The  real  estate  of  a  railroad  com- 
pany, it  held,  could  not  be  viewed  as  a  part  of  a  unified 
system,  but  must  be  assessed  in  each  district  as  the  actual 
value  of  that  part  found  within  the  district.    No  account 

4  New  York  Statutes,  1848,  Chap.  140.  This  law  followed  others 
of  a  similar  nature  which  affected  only  particular  companies.  The 
same  provision  was  incorporated  in  the  act  of  1850  which  governed 
railroad  incorporation.  Heavy  penalties  were  attached  for  refusal 
to  pay  tolls. 

5  New  York  Statutes,  1851,  Chap.  497. 

'  Mohawk  and  Hudson  River  Railroad  Company  vs  Chute,  4  Paige 
384. 


124        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

was  to  be  taken  of  income  or  general  profitableness.  The 
method  of  appraisal  was  to  be  the  same  as  that  used  for 
assessing  adjacent  lands  owned  by  individuals.7 

This  decision,  given  in  1851,  was  followed  in  1853  by 
the  Comptroller's  recommendations  relating  to  railroad 
property.  He  held  that  a  railroad  was  nothing  more  nor 
less  than  a  farm,  cultivated  and  used  for  its  particular 
objects  instead  of  raising  grain  and  rearing  stock.  It 
was  real  estate  to  be  assessed  simply  as  such.8  The  Com- 
troller,  in  his  report  for  the  preceding  year,  had  advanced 
the  opinion  that  neither  capital  stock  nor  actual  cost  would 
be  a  measure  of  value.  Neither  did  he  consider  the  dis- 
trict assessors  capable  of  ascertaining  the  value  of  rail- 
road property.  He  suggested  that  such  assessment  might 
be  better  made  by  county  or  even  state  officials,  and  the 
value  distributed  to  local  districts  in  proportion  to  road 
mileage.9 

The  questions  upon  which  this  litigation  was  based 
were  soon  settled  by  statute.  In  1857  a  law  was  enact- 
ed10 which  removed  railroads  from  the  scope  of  the  gen- 
eral tax  system,  and  which  formulated  a  scheme  for  tax- 
ing such  corporations  as  a  separate  class.  The  real  estate 
of  railroads  was  to  be  assessed  locally  in  the  same  manner 
as  the  real  estate  of  individuals.  Personal  property  was 
to  be  assessed  by  the  assessors  in  the  district  where  the 
principal  office  was  located,  but  the  proceeds  of  this  tax 
were  to  be  paid  by  the  companies  to  the  collectors  of  the 
several  localities  through  which  the  road  passed.  The  pay- 
ment was  to  be  in  proportion  to  mileage.  For  the  pur- 
pose of  arriving  at  the  assessment,  every  railroad  com- 
pany was  required  to  make  an  annual  report  to  the  as- 
sessors of  each  district  in  which  they  owned  property. 
The  report  was  to  specify  the  land  owned  by  the  com- 
pany,11  the  length,   cost,   present  value  and  percentage 

''Albany  and  Schenectady  Railroad  vs  Osborn,  12  Brbour,  223. 

8  Annual  Report  of  New  York  State  Comptroller,  Assembly  Docu- 
ments 1853,  Vol.  1,  N  >.  5. 

9  Annual  Report  of  New  York  State  Comptroller,  Assembly  Docu- 
ments 1852,  Vol.  1,  No.  10. 

10  New  York  Statutes,  1857,  Chap.  536. 

"  In  giving  the  amount  of  land  the  companies  were  to  deduct  the 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  125 

depreciation  of  the  superstructure,  and  the  value  of  build- 
ings belonging  to  the  company.  Such  a  list  was  to  be 
taken  as  prima  facie  evidence  of  value  unless  fraud  were 
suspected  by  the  assessors.  Whenever  the  correctness  of 
the  report  was  questioned  evidence  could  be  taken  under 
oath  as  to  its  completeness  and  the  valuation  of  the  prop- 
erty listed  therein.  In  no  case  could  the  valuation  be 
made  less  than  that  found  in  the  report  of  the  company. 

This  was  the  first  attempt  by  the  legislature  to  solve 
the  valuation  problem.  The  method  was  self-assessment 
with  revision  by  the  assssors.  The  procedure  was  merely 
an  attempt  to  administer  the  general  property  tax.  That 
the  system  was  defective  is  evident  because  there  was  no 
adequate  supervision  of  the  assessment,  and  no  assurance 
that  the  reports  made  by  the  companies  were  accurate. 
It  was,  however,  enough  of  a  departure  from  ordinary 
methods  to  be  viewed  with  misgivings  by  state  officials.12 
The  administrative  features  were  somewhat  modified  in 
1870,  but  not  so  as  to  affect  its  general  nature.13 

In  practice  the  assessment  of  railroad  property  was 
left  pretty  much  to  the  local  assessor  and  gross  inequal- 

areas  used  in  crossing  highways.  If  the  report  was  more  than  thirty 
days  late  a  penalty  of  two  hundred  and  fifty  dollars  was  attached. 
This  was  to  be  collected  by  the  assessors  and  used  for  the  benefit 
of  the  poor. 

"The  Comptroller,  in  his  report  for  1858,  (Assembly  Documents, 
Vol.  1,  No.  5)  attacks  the  law  as  being  unjust.  He  criticizes  the  at- 
tempt to  get  valuations  from  company  reports  and  asks  that  the 
law  be  revised  so  as  to  assess  railroad  property  in  the  same  manner 
as  other  property.  The  law  was  not,  however,  strictly  applied  in 
all  cases.  Exemptions  from  taxation  were  sometimes  granted  for 
specific  reasons.  For  example,  in  1866  (Chap.  546)  the  Pough- 
keepsie  and  Eastern  Railroad  was  exempted  from  the  taxes  upon 
real  estate,  personal  property  and  capital  stuck  until  a  single  track 
had  been  completed.  The  period  of  exemption,  however,  was  not 
to  exceed  ten  years. 

18  New  York  Statutes.  1870,  Chap.  506.  Provision  was  made  by 
which  the  tax  could  be  paid  to  the  county  treasurer.  If  this  were 
done  a  fee  of  one  per  cent  of  the  tax  was  attached.  If  the  tax  were 
not  paid  within  thirty  days  the  district  collectors  proceeded  to  col- 
lect the  tax  together  with  a  five  per  cent  fee.  The  taxes  paid  to  the 
county  treasurer  were  credited  to  the  districts  by  which  they  were 
assessed.  Should  this  amount  to  more  than  what  would  naturally 
be  paid  to  the  county  by  the  district  the  difference  would  be  paid 
by  the  county  to  the  district. 


126        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ities  resulted.  The  Special  Tax  Commission,14  in  their 
report  made  in  1871,  describe  the  working  of  the  system 
as  follows : 

The  System  of  taxing  railroads  in  the  state  of  New  York  is  as 
imperfect  and  objectionable  as  it  well  can  be.  The  road  beds  and 
the  real  estate  of  the  companies  are  valued  and  assessed  in  the 
different  towns  through  which  the  line  of  the  road  extends,  accord- 
ing to  no  uniform  standard,  but  at  the  discretion  or  rather  caprice, 
of  the  local  assessors,  from  whose  decisions  there  is  practically 
no  appeal.  In  some  towns  the  standard  of  valuation  of  the  prop- 
erty is  reported  to  depend  on  the  amount  annually  required  to  de- 
fray the  highway  expenditures ;  and  in  another  instance  the  erec- 
tion of  an  expensive  bridge  over  a  navigable  stream  was  regarded 
by  one  of  the  towns,  on  whose  territory  the  bridge  abuts,  as  a  suffi- 
cient warrant  for  the  erection  of  a  new  school  house.  In  one  town, 
where  a  company  had  substituted  an  expensive  station  house  for  a 
dilapidated  one  to  the  great  benefit  of  the  town,  the  erection  of  the 
building  was  immediately  made  the  occasion  of  a  large  increase  in 
the  taxation  to  which  the  company  was  subjected.  The  effect  of 
this  was  that  the  company  concluded  not  to  repeat  the  building  of 
any  more  expensive  station  houses  along  their  line,  but  would  get 
along  with  cheapest  buildings  possible ;  or  in  other  words  the  action 
of  one  town  in  respect  to  taxation,  was  made  to  result  in  detriment 
to  all  other  towns  on  the  line  of  the  road,  whose  need  for  improv- 
ed station  houses  might  be  equally  or  more  imperative.  On  the 
other  hand  it  is  alleged  that  the  railroad  companies  often  endeavor 
to  protect  themselves  from  what  they  call  injustice,  by  threat  of 
retaliatory  measures  or  by  actually  executing  such  as  in  the  above 
case.  And  that  after  all,  the  companies  do  not  pay  in  the  aggregate 
in  the  way  of  direct  taxes  as  much  as  would  be  equivalent  to  the 
average  rate  imposed  throughout  the  state  on  similar  corporate 
property  such  as  banks,  gas  and  manufacturing  companies ;  rolling 
stock,  in  their  valuations  being  classed  as  real  estate,  while  the 
funded  and  floating  debt  is  made  to  offset  and  neutralize  as  in- 
debebtedness  all  valuations  and  assessments  against  the  company 
for  personal  property.  Duing  the  year  1869  the  aggregate  tax  paid 
by  steam  railroads  on  real  estate,  according  to  the  State  engineer, 
amounted  to  $1,565,670.52.  ...  If  the  same  propety  had  paid 
the  average  rate  of  taxation  throughout  the  entire  state  for  that 
year  (2.48  cents  on  the  dollar)  the  aggregate  would  have  amounted 
to  $6,859,467.75 In  New  York  the  real  estate  of  rail- 
roads as  well  as  the  road  bed  is  assessed  in  the  different  towns 
through  which  the  road  runs.  The  Supreme  Court  of  Massachu- 
setts which  has  had  the  question  before  it  in  at  least  three  different 
forms,  has  uniformly  decided  that  land  taken  or  purchased  by  rail- 
road companies  for  their  tracks,  not  exceeding  five  rods  in  width, 
is  taken  in  the  exercise  of  the  right  of  eminent  domain  and  is  there- 
fore not  liable  to  local  taxation.  The  court  held  that  local  taxation 
of  a  road  bed  was  illegal  bacause  the  road  was  a  public  work,  es- 

14  Report  of  Special  Tax  Commission  1871,  Assembly  Documents, 
1871,  Vol.  3,  No.  39. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  127 

tablished  by  public  authority,  intended  for  public  use  and  benefit, 
the  use  of  which  is  secured  to  the  whole  community,  and  constitutes 
therefore,  like  a  canal,  turnpike  or  highway,  a  public  easement. 

After  quoting  the  Massachusetts  decision  at  length, 
the  members  of  the  Commission  expressed  the  opinion 
that  it  would  be  better  for  New  York  to  adopt  the 
Massachusetts  system  thus  putting  the  taxation  of  rail- 
road companies  exclusively  under  state  control.  They 
recommended  that  the  comptroller  or  some  other  state  offi- 
cer be  authorized  to  assess  the  corporate  franchise  at  a 
valuation  equal  to  the  aggregate  market  value  of  its  capi- 
tal stock,  and  funded  and  floating  debt,  less  the  cash  on 
hand.  Railroads  should  be  taxed  on  this  value  at  a  fixed 
rate  and  should  be  exempt  from  all  other  taxes.  The  tax 
could  either  be  paid  and  used  locally,  or  be  paid  to  the 
state  and  used  for  state  purposes.  Since  franchises, 
however,  were  granted  in  the  name  of  all  the  people,  and 
since  each  district  through  which  a  railroad  runs  had 
special  benefits  from  the  railroad  in  the  increase  of  the 
value  of  its  local  property  and  of  the  trade  and  conven- 
ience of  its  citizens,  the  commission  preferred  that  the  tax 
be  used  for  state  purposes.  The  commission  expressed 
the  opinion,  also,  that  one  of  the  avowed  objects  of  those 
who  had  framed  the  tax  laws  [relating  to  railroad  prop- 
erty] was  to  get  as  much  of  confusion,  inconsistency,  and 
irregularity  in  the  subject  matter  as  the  circumstances 
would  render  possible.15 

These  recommendations  of  the  special  commission  met 
no  better  fate  than  did  previous  recommendations  for  re- 
form. Inequalities  continued  in  the  assessment  not  only 
of  railroads  but  also  of  telegraph  companies,  gas  com- 
panies, etc.,  as  well.  Telegraph  companies  were  assessed 
only  on  their  personal  property.  The  largest  company 
in  the  state  had  its  principal  office  in  the  state  and  was 
assessed  at  only  $200,000,  while  another  large  corporation 
was  assessed  at  $iooo.16  The  assessment  of  the  railroad 
property  became  increasingly  unfair;  in  some  parts  of  the 
state  it  was  assessed  higher  than  other  real  estate  while  in 

15  Page  183  of  report. 

"Annual    Report   of    State   Assessors,    1874,    Senate    Documents, 
1874,  Vol.  2.,  No.  23. 


128        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

other  parts  it  practically  escaped  taxation.  The  rolling 
stock  and  other  personal  property  was  seldom  assessed. 
One  reason  for  this  was  the  difficulty  in  determining  the 
principal  office.  Instances  arose  where  the  assessors  were 
told  in  one  city  that  the  principal  office  was  in  another 
city  while  the  tax  officials  there  were  informed  that  it  was 
in  the  first  city.  The  state  assessors  thought  that  no  such 
amount  of  real  estate  devoted  to  other  uses  went  untaxed, 
whether  mortgaged  or  not.17  The  press  was  equally 
critical,  and  pointed  out,  that  despite  some  cases  of  real 
injustice  to  the  railroads,  the  rate  of  tax  paid  on  the  capi- 
tal invested  was  very  low.  The  New  York  Times,  for 
example,  held  that  the  state  was  entitled  to  exact  from 
railroads  and  other  great  corporations  some  fiscal  equiva- 
lent for  the  charter  privileges  given  them  by  the  state. 
The  taxes  then  paid  by  such  corporations,  it  was  pointed 
out,  bore  no  adequate  proportion  to  the  capital  invested 
in  the  undertakings  nor  to  the  large  returns  secured  by 
the  proprietors.  This  capital,  represented  by  the  capital 
stock,  bonds  and  floating  debt,  practically  escaped  taxa- 
tion, while  its  enormous  earnings  contributed  nothing  to 
the  state.  The  receipts  from  the  real  estate  were  a  baga- 
telle in  comparison  with  capital  or  earnings,  and  yet  the 
real  estate  as  assessed  by  the  district  officials  was  prac- 
tically the  entire  basis  of  taxation.  It  suggested  a  tax 
upon  railroads  on  the  basis  of  stock,  bonds,  and  floating 
debt,  which,  it  held,  might  be  taken  to  represent  the  prop- 
erty of  the  railroad.  Such  a  basis  of  assessment  would 
simplify  matters,  and  eliminate  the  necessity  for  trouble- 
some investigation.  Since,  however,  these  three  items 
represent  the  aggregate  of  property  to  be  assessed,  it 
would  abandon  the  separate  assessment  of  real  estate 
for  state  purposes.  The  road  bed,  moreover,  should  not 
be  assessed  piecemeal  by  local  authorities  since  it  cannot 
be  properly  taxed  except  as  a  part  of  the  grand  aggre- 
gate. Neither  could  land  taken  for  a  right  of  way  be 
treated  as  ordinary  real  estate  for  in  reality  it  was  but 
held  in  trust  for  the  public,  since  the  right  under  which 

"Annual  Report  of   State  Assessors,   1877.     Senate   Documents, 
1877,  Vol.  2,  No.  26. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  129 

it  was  acquired  and  used  was  in  certain  contingencies  re- 
vocable. To  treat  it  as  real  estate  was  to  assume  the  com- 
panies to  be  absolute  owners.18  That  such  opinions  did 
not  weigh  heavily  with  the  legislature  is  shown  by  the 
fact  that  by  a  statute  of  1878  pipe  line  companies  were 
to  be  assessed  and  taxed  in  the  same  manner  as  rail- 
roads.19 

The  lack  of  definiteness  in  the  law  continued  to  cause 
much  litigation.  The  rule  for  the  proper  valuation  of  rail- 
load  real  estate  as  laid  down  in  Albany  and  Schenectady 
Railroad  vs  Osborn  20  proved  to  be  unsatisfactory  and 
later  court  decisions  on  this  point  show  an  important 
change  of  opinion.  In  1866  the  Supreme  Court  held  that 
the  real  estate  of  railroad  companies  should  be  assessed 
at  its  actual  value  for  the  purpose  to  which  it  had  been 
adapted  and  not  as  mere  farming  land.  In  estimating 
this  value  the  assessors  were  not  bound  to  consider  it 
merely  as  land  and  superstructures,  isolated  from  other 
parts  of  the  estate  which  contributed  to  make  up  a  com- 
plete and  safe  railroad  system.21  The  Court  of  Appeals, 
held,  in  1871,  that  the  value  of  each  piece  of  property 
was  to  be  estimated  in  connection  with  its  position,  its 
incidents,  and  the  business  and  profits  to  be  derived  there- 
from.22 

The  first  important  change  in  the  statuatory  system  of 
taxing  transportation  companies  came  in  1880.  The  tax 
on  land  and  real  estate  remained  as  before,  but  a  tax 
was  imposed  on  gross  earnings  in  lieu  of  the  tax  on  capital 
and  personal  property.  This  was  a  state  tax,  to  be  paid 
semi-annnually,  of  five  tenths  of  one  per  cent  of  the  gross 
earnings  from  business  transacted  in  the  state.  Compan- 

lsNew  York  Times,  Editorial,  April  5,  1879.  An  editorial  for 
April  8,  1879  pointed  out  that  in  the  assessment  of  capital,  the  dis- 
tinction between  nominal  and  actual  values  must  be  regarded,  at 
least  so  far  as  the  stock  was  concerned.  With  one  or  two  well- 
defined  legislative  rules  applicable  to  the  assessment,  it  suggested 
there  would  be  no  serious  difficulty. 

19  New  York  Statutes,  1878,  Chap.  203. 

"Above,  page  124. 

"  People  vs  Fredericks,  48  Barbour,  173. 

M  Buffalo  State  Line  Railroad  vs  Assessors,  48,  N.  Y.,  70. 


130        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ies  were  required  to  render  a  sworn  report  of  their  gross 
earnings  under  a  penalty  of  a  ten  per  cent  increase  in  the 
tax.23  In  1 88 1  the  tax  was  specially  made  a  tax  upon 
the  corporate  franchise  or  business  in  the  state.24  By  a 
law  of  1906  a  railroad  company  whose  property  was  leas- 
ed to  another  company  must  pay  a  tax  of  three  per  cent 
on  all  dividends  in  excess  of  four  per  cent.25 

The  laws  taxing  railroads,  with  some  modifications, 
were  applied  to  other  public  untility  companies.  The 
property  of  telegraph  companies  was  to  be  assessed  in 
the  districts  where  located  from  statements  made  by  the 
companies.26 

The  assessment  and  collection  of  taxes  on  this  form  of 
property  was  to  be  administered  in  the  same  way  as  taxes 
on  other  real  estate  were  assessed  and  collected.  In  1896 
all  companies  engaged  in  furnishing  water  or  gas27  for 
heating,  lighting  and  power  purposes,  in  addition  to  the 
semi-annual  five-tenths  of  one  per  cent  franchise  tax  upon 
gross  earnings,  were  required  to  pay  a  three  per  cent  tax 
on  dividends  declared  above  four  per  cent  on  the  actual 
capital  employed.  Reports  were  required  showing  cap- 
ital, earnings  and  dividends.  Elevated  roads  and  surface 
roads  not  operated  by  steam  were  to  pay  an  annual  fran- 
chise tax  of  one  per  cent  of  gross  earnings  within  the 
state,  and  three  per  cent  of  the  dividends  declared  in  ex- 
cess of  four  per  cent  on  the  capital  employed.28 

"  New  York  Statutes,  1880,  Chap.  542.  As  stated  in  the  act  it 
applied  to  every  corporation,  association  or  joint  stock  company, 
whether  domestic  or  foreign,  formed  for  transportation  purposes; 
to  telegraph,  telephone,  palace  and  sleeping  car  companies.  It  did 
not,  however,  apply  to  street  railways. 

24  New  York  Statutes  1881,  Chap.  361. 

25  New  York  Statutes,  1906,  Chap.  477. 

"•New  York  Statutes,  1881,  Chap.  591.  The  telegraph  companies 
were  required  to  furnish  an  annual  report  to  the  state  comptroller 
and  to  the  treasurer  of  each  county  where  they  had  property.  From 
the  county  treasurer  the  district  officials  were  to  get  copies  of  the 
report  from  which  to  make  assessments.  A  law  of  1886  (Chap. 
659)  defined  "lines"  as  including  interest  in  lands  on  which  poles 
stand,  right  to  erect  poles,  and  the  poles,  wires,  arms,  insulators, 
etc.,  used  as  a  part  of  the  line.  It  further  gave  the  tax  collectors 
the  right  to  sell  a  part  of  the  line  for  unpaid  taxes  and  to  convey 
it  to  the  purchaser. 

27  Possibly  a  comma  is  omitted  after  gas.     See  note  on  page  135. 

**  New  York  Statutes,  1896,  Chap.  908. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  131 

These  statutes,  with  slight  modifications,  remain  in 
force  and  represent  the  present  law  for  the  taxation  of 
public  service  corporations.  All  are  subject  to  the  annual 
franchise  tax  except  elevated  railways  and  surface  roads 
not  operated  by  steam,  and  water,  heat,  light,  and  power 
companies.  The  exempted  railways  must  pay  an  annual 
tax  of  one  per  cent  of  the  gross  earnings  within  the  state 
besides  a  tax  of  three  per  cent  on  dividends  in  excess  of 
four  per  cent  on  the  actual  amount  of  capital  invested. 
The  water,  light,  and  power  companies  must  pay  an  an- 
nual tax  of  five  tenths  of  one  per  cent  of  gross  earnings 
and  the  three  per  cent  tax  on  dividends  in  excess  of  four 
per  cent  on  capital  invested.  In  addition  to  the  annual 
franchise  tax  all  transportation  and  transmission  compan- 
ies must  pay  the  "additional  franchise  tax."  This  amounts 
to  five  tenths  of  one  per  cent  of  the  gross  earnings.  All 
are  subject  to  the  organization  tax  and  the  stock  transfer 
tax.29  These  taxes  which  are  all  for  state  purposes  are 
in  lieu  of  all  other  taxes  for  state  purposes  upon  per- 
sonal property.  The  companies  are,  however,  assessed 
and  taxed  locally — the  real  estate  at  situs,  and  the  capital 
stock  at  the  place  of  the  principal  office.  Since  the  state 
levies  a  small  direct  tax,  a  part  of  the  local  tax  on  cor- 
porations goes  for  state  purposes.  It  would  seem  that 
only  that  tax  assessed  on  real  estate  could  be  so  used. 

There  has  been  a  great  deal  of  litigation  since  these 
new  taxes  have  been  inaugurated,  but  this  has  been  due 
only  in  small  measure  to  the  state  taxes.  The  large  ma- 
jority of  cases  have  arisen  from  the  continued  attempt  to 
apply  the  general  property  tax  to  railroad  and  telegraph 
companies.  In  the  case  of  the  state  tax  it  has  sometimes 
been  necessary  for  the  courts  to  determinine  just  what  the 
gross  earnings  were  or  what  were  derived  from  business 
"originating  and  terminating  within  the  state."  The 
Court  of  Appeals  held,  for  instance,  that  money  received 
for  carrying  the  mails  was  not  taxable  where  it  was  im- 

29  See  Chapter  II  page  31  for  a  discussion  of  the  Organization  Tax, 
and  Chapter  III  page  52  for  the  Stock  Transfer  Tax.  In  addition 
to  these  taxes  there  is  the  Special  Franchise  Tax  which  is  discussed 
in  the  next  chapter. 


132        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

possible  to  ascertain  the  proportion  of  the  mail  traffic 
which  originated  and  terminated  within  the  state.30 

The  questions  as  to  the  proper  valuation  of  real  estate 
is  responsible  for  most  of  the  cases  relating  to  local  taxa- 
tion.. The  courts  have  alternated  between  earnings  and 
the  cost  of  reproduction  as  the  proper  basis  of  valuation. 
Most  of  the  decisions  in  the  70's  and  8o's  attributed  an 
important  place  to  earnings.  The  Court  of  Appeals,  for 
example,  in  1871  held  that  the  assessors  were  justified 
in  taking  into  consideration  the  earning  power  of  the 
road  considered  as  a  whole.  This  was  because,  it  held, 
"a  railroad  through  the  town  only,  having  no  connection 
at  either  end,  would  be  of  no  value.  The  erections  and 
superstructure  would  destroy  its  value  for  farming  pur- 
poses. As  a  railroad  it  would  have  no  passengers  and  no 
business  and  would  be  worthless.  The  attempt  to  use  it 
as  such  would  involve  debt  and  embarrassment  but  no 
profit.  .  .  .  Each  piece  of  property  is  to  be  estimated 
in  connection  with  its  position,  and  the  business  and  profit 
to  be  derived  therefrom.  The  road  in  question  is  part 
of  a  whole  and  is  to  be  valued  as  such.  This  is  independ- 
ent of  the  taxation  of  the  capital.  It  is  the  estimate  of  the 
value  of  the  real  estate  for  railroad  purposes  as  a  mill  is  to 
be  estimated  for  its  value  for  milling  purposes  and  not  as 
its  value  for  a  church  or  banking  house."31 

In  1882  the  Supreme  Court  held  that  a  railroad  should 
not  be  valued  for  taxation  as  a  long  narrow  strip  of  land 
used  for  farming  or  for  any  other  purpose  except  as  the 
bed  of  a  railroad.  Nor  should  the  part  of  a  railroad  in 
a  particular  town  be  estimated  by  the  cost  of  any  expen- 
sive rock  cut,  or  quicksand  filled,  or  a  terminal  located  in 
that  town.  It  should  be  valued  as  a  part  of  a  whole  and 
the  consideration  of  profits  should  have  a  large,  if  not 
controlling,  influence  upon  the  value.32 

80  Morgan  vs  New  York  Central  and  Hudson  River  Railroad,  168 
N.  Y.,  1. 

n  Buffalo  and  State  Line  Railroad  Company  vs  Assessors,  48  N. 
Y.,  70. 

82  O.  &  L.  C.  Railroad  Company  vs  Pond,  13  Abbott's  New  Cases, 
1.  In  the  cases  of  Albany  and  Greenbush  Bridge  Company  vs. 
Weaver,  (34  Hun,  321)  and  Powers  vs  Kalbfleish,  (25  Appellate 
Division,  432)  practically  the  same  attitude  was  taken. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  133 

In  1897,  however,  the  Court  of  Appeals  held  the  re- 
production cost  to  be  the  proper  basis  for  valuation.  The 
Delaware,  Lackawanna  and  Western  Railroad  Company 
had  been  assessed  on  seven  and  one  half  miles  of  road, 
the  cost,  rentals,  and  earnings  being  taken  into  considera- 
tion. This  assessment  was  admitted  to  be  higher  than  the 
cost  of  reproduction.  The  court  pointed  out  the  difficulty 
of  formulating,  from  the  adjudged  cases,  any  general  rule 
applicable  in  all  cases  to  the  valuation  of  the  real  estate  of 
a  railroad  company  for  the  purpose  of  taxation.  The  cost 
of  reproduction,  said  the  court,  seems  to  be  the  just  and 
reasonable  rule  of  valuation,  and  it  could  conceive  of  no 
reason  for  assessing  the  property  at  a  greater  sum  than 
this.  Whether  it  was  really  worth  what  it  would  cost  to 
reproduce  it  would  depend  upon  the  earning  capacity  of 
the  road  after  it  was  built.  After  a  road  had  been  valued 
at  what  it  would  cost  to  procure  the  land,  construct  the 
road  bed,  put  down  the  ties  and  rails,  and  erect  the  build- 
ings all  new,  it  was  difficult  to  see  any  ground  for  assess- 
ing it  at  a  larger  sum.  The  value  of  a  railroad  for  taxa- 
tion might  be  much  less  than  the  actual  cost  of  produc- 
ing the  property  in  the  condition  in  which  it  was  found 
by  the  assessors,  but  it  could  never  exceed  it.  Any  method 
of  assessment  was  erroneous  which  included  the  privileg- 
es and  franchises  of  a  company  in  the  valuation  of  its  real 
estate.33 

In  commenting  on  this  decision  the  New  York  Public 
Service  Commission  for  the  Second  District  pointed  out 
that  the  real  ground  of  the  decision  was  not  that  the  cost 
of  reproduction  was  necessarily  a  true  basis  of  value,  but 
the  only  practical  and  practicable  one.  They  interpreted 
the  reasoning  of  the  court  somewhat  as  follows :  The  as- 
sessors were  to  assess  the  real  estate  and  when  they  be- 
gan to  try  to  determine  how  much  was  earned  from  in- 
tangibles and  franchises,  erroneous  decisions  would  nec- 

38  Delaware,  Lackawanna  &  Western  Railroad  Company  vs  Clapp, 
152  N.  Y,  39.  In  1908  the  same  court  held  (O.  &  W .  Railroad 
Company  vs  Shaw,  202  N.  Y.,  556)  that  reproduction  cost  was  the 
maximum  valuation,  for  tax  purposes,  to  put  upon  the  part  of  a 
continuous  railroad  situated  within  a  given  tax  district.  If  the  road 
were  not  a  paying  one  the  valuation  might  even  be  less. 


134        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

essarily  result.  Such  determinations  were  too  great  for 
the  capacity  of  the  average  assessor;  that  assessors  had 
better  be  confined  to  the  simple,  definite  assessment  of  real 
estate,  easily  applied  and  which  would  result  in  practical 
justice.  The  court,  pointed  out  the  commission,  adopted 
the  cost  of  reproduction  with  all  its  known  absurdities 
and  inconsistencies.  In  one  town  five  miles  of  track  may 
have  been  constructed  with  little  expense  while  in  an  ad- 
joining one  cuts  and  fills  may  have  been  expensive.  One 
portion  would  be  as  great  value  to  the  operation  of  the 
road  as  another.  If  there  was  any  theory  upon  which 
such  discrepant  theories  could  be  justified  it  was  cost  of 
reproduction;  yet  it  was  doubtful  whether  the  end  was 
accomplished  by  that  sort  of  assessment.34 

The  decision,  however,  is  more  logical  than  this  interpre- 
tation would  indicate.  If  the  property,  track,  buildings, 
road  bed,  etc.,  were  to  be  assessed  piece-meal  and  disjoint- 
edly,  then  the  reproduction  cost  would  represent  the 
maximum  value  any  particular  portion  could  have.  Very 
often  the  value  might  be  less  than  this.  It  is  only  in  as- 
sessing the  company  as  a  whole  that  the  earning  capacity 
can  be  considered  since  this  is  an  attribute  of  the  whole 
plant  and  not  of  any  small  isolated  part. 

In  1908  the  Appellate  Division  of  the  Supreme  Court 
prescribed  a  method  for  the  valuation  of  the  property  of 
a  water  company.  This  differs  from  the  methods  just  de- 
scribed in  that  it  took  earnings  as  the  basis  for  the  as- 
sessment. It  held  that  where  a  water  company  owned 
tangible  property  outside  the  street,  and  both  tangible 
and  intangible  property  in  the  street,35  each  of  these  three 
classes  should  be  considered  as  contributing  pro  rata  to 
the  net  earnings  according  to  its  respective  value.  Actual 
value  and  not  cost  was  the  true  basis  of  taxation,  hence 
the  value  of  the  intangible  property — the  mere  right  to 
lay  water  mains —  must  be  determined  by  treating  it  as  a 
part  of  the  plant  and  basing  its  value  upon  capitalized  net 
earnings.  Intangible  property  had  a  value  if  it  was  earn- 

M  Report  of  New  York  Public  Service  Commission,  Second  Dis- 
trict, 1913,  Vol.  III.  p.  306. 

M  By  tangible  property  in  the  street  the  court  meant  the  fixtures, 
etc.  while  the  intangible  property  was  the  right  to  use  the  street. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  135 

ing  an  income  and  if,  even  with  good  management,  there 
was  no  adequate  return,  it  had  correspondingly  little 
value.  The  value  of  the  property  of  a  water  company  for 
the  purpose  of  taxation,  especially  the  value  of  its  fran- 
chise and  good  will,  could  not  be  ascertained  until  the 
franchise  tax,36  all  other  taxes  and  a  proper  up-keep  fund 
have  been  deducted  from  current  earnings.  The  earnings 
and  expenses  for  one  year  alone  should  not  be  considered, 
but  the  average  earnings  and  expenses  for  a  series  of 
years  or  for  such  time  as  is  reasonably  available.  The 
method  prescribed  for  finding  the  value  of  intangible 
property  was  as  follows :  from  earnings  deduct  salaries 
and  other  expenses  of  maintenance,  all  taxes  including 
approximate  amount  of  the  special  franchise  tax  and  such 
earnings  as  would  be  proper  for  all  up-keep  not  ordinarily 
covered  by  maintenance  account;  the  balance  was  to  be 
treated  as  the  actual  net  earnings.  From  this  six  per 
cent  of  the  value  of  real  estate  and  other  tangible  proper- 
ty was  to  be  deducted  as  a  fair  return  on  investment.  The 
earnings  which  remained,  capialized  at  six  per  cent,  would 
represent  the  fair  value  of  the  intangible  property.37 

Here  a  definite  rule  for  the  valuation  of  a  public  utility 
company  for  taxation  is  given  with  capitalized  net  earn- 
ings as  the  fundamental  basis.  Yet  this  rule  proved  no 
more  satisfactory  than  former  ones  and  many  assessors 
continued  to  use  their  own  guess  work  in  valuation.  The 
reasoning  of  the  Public  Service  Commission  which  we 
have  noted  above,  and  the  complexity  of  the  system  pro- 
posed easily  explain  why  it  is  not  generally  used.  Many 
assessors  do  not  have  the  time  or  inclination  to  use  such 
schemes  as  the  courts  may  dictate  while  many  others  do 
not  possess  the  ability  to  use  them  even  if  they  had  the 
desire. 

36  This  undoubtedly  has  reference  to  the  special  franchise  tax 
which  is  discussed  in  the  next  chapter.  Section  186  of  the  tax  law 
exempts  companies  formed  for  supplying  water  or  gas,or  for  elec- 
tric or  steam  heating  from  the  annual  franchise  tax.  A  literal  in- 
terpretation of  Section  183  of  the  same  law  would  subject  general 
water  companies  to  the  annual  franchise  tax.  Under  the  list  of 
exemptions  it  states  that  companies  formed  for  supplying  water  or 
gas  for  electric  or  steam  heating  shall  be  exempt. 

87  Jamaica  Water  Supply  Company  vs  Tax  Commissioners,  128 
Supreme  Court,  Appellate  Division,  13. 


136        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

The  present  system  of  taxation,  though  somewhat  com- 
plicated because  of  the  elaborate  classifications  of  public 
utilities,  did  get  rid  of  some  of  the  old  difficulties.  With 
the  adoption  of  uniform  accounting,  corporation  reports 
are  becoming  more  trustworthy  and  a  part  of  the  taxes 
are  easily  computed.  The  gross  earnings  tax  for  state 
purposes  has  secured  a  greater  equality  than  when  the  tax 
was  levied  by  the  local  assessors,  and  is  of  course  a  real 
advance.  A  large  amount  of  inequality  has  been  found  in 
telegraph  valuations  since  these  companies  have  practical- 
ly been  made  their  own  assessors.  The  estimated  cost  of 
lines  as  returned  by  the  various  companies  has  shown 
great  disparaities.  Although  some  valuations  were  ex- 
tremely low,  yet  there  was  no  official  review  and  power 
to  question  their  correctness  was  nowhere  specifically 
given.  But  the  system  has  worked  smoothly  enough  so 
that  there  have  been  few  complaints  from  either  state 
officials  or  the  corporations,  and  consequently  the  courts 
have  had  little  to  do. 

This  has  not  been  true  with  assessment  and  taxation 
for  local  purposes.  Complaints  of  inequality  continue, 
and  litigation  increases.  This  last  is  initiated  largely  by 
the  railroad  companies  who  claim  that  their  property  is 
assessed  at  much  higher  figures  than  is  other  real  prop- 
erty in  the  same  districts.  Many  other  states  are  far  in 
advance  of  New  York  in  seeking  to  remedy  these  evils. 
They  have  recognized  the  impossibility  of  securing  equal- 
ity and  justice  in  the  taxation  of  utility  companies 
through  local  assessors,  and  have  conferred  the  power  of 
assessing  such  companies  upon  some  central  board.  In 
New  York  both  state  officials  and  other  persons  as  well 
as  organizations  have  continued  to  advocate  that  such 
assessment  be  taken  from  local  officials  and  given  over 
to  a  state  board.  The  fourth  State  Conference  on  Taxa- 
tion which  met  in  191 4  at  Syracuse  adopted  the  follow- 
ing resolution :  Whereas,  The  present  system  of  the  as- 
sessment of  the  real  and  personal  property  of  railroads 
and  other  large  corporations  by  local  assessors  imposes 
an  unnecessary  and  difficult  task  upon  such  assessors  and 
leads  to  inequitable  results,  and,  Whereas,  This  method 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  137 

of  assessment  has  been  abandoned  in  many  other  states, 
it  is  Resolved,  That  the  laws  should  be  so  changed  as  to 
empower  the  State  Board  of  Tax  Commissioners,  or  ex- 
perts employed  by  them,  to  assess  the  real  property  and 
other  taxable  assets  of  railroads  and  of  large  public  ser- 
vice corporations  operating  in  more  than  one  tax  district. 

To  establish  a  uniform  system  of  taxing  public  utili- 
ties which  will  be  just  to  the  corporations  and  the  public, 
equitable,  easily  administered  and  which  will  leave  no 
room  for  evasion  is  a  difficult  task.  A  number  of  dif- 
ferent systems  have  been  tried  with  different  bases  for 
the  tax  but  none  of  them  has  the  unqualified  support  of 
every  authority  on  taxation.  That  the  New  York  system 
should  be  recast  and  improved,  however,  all  agree,  and 
we  shall  briefly  note  some  possible  alternatives  or  modi- 
iications..  The  systems  which  have  been  most  discussed 
are  a  gross  earnings  tax,  a  net  earnings  tax,  and  the  more 
conservative  method  of  maintaining  some  form  of  the 
ad  valorem  system. 

New  York  at  present,  we  have  seen,  uses  gross  earn- 
ings as  a  basis  for  part  of  the  additional  franchise  tax. 
This  basis  for  taxing  corporations,  and  especially  public 
service  corporations,  is  at  present  widely  advocated.  Some 
of  the  advantages  claimed  for  the  gross  earnings  tax  may 
be  briefly  summarized. 

With  gross  earnings  taken  as  the  basis  for  taxes  we 
do  not  find  the  difficulty  of  ascertainment  as  when  net 
income  is  taken.  There  has  been  comparatively  little  dis- 
pute as  to  what  constitutes  the  gross  returns  of  a  corpor- 
ation, but  difficulties  have  been  encountered  in  apportion- 
ing this  to  expenses  and  net  returns.38  Any  system  of 
accounting  will  give  the  gross  earnings  and  no  question 
arises  as  to  what  items  should  be  allowed.  All  items  of 
expenses  must  be  taken  from  the  gross  receipts,  and  it 
is  not  at  all  illogical  to  consider  taxes  an  item  of  expense 
just  as  much  as  wages,  rent,  etc.  The  discretionary  pow- 
ers of  officials  can  easily  be  dispensed  with  since  there  is 
little  chance  of  manipulating  the  gross  receipts  statement 

"This  objection  would  have  little  weight  in  the  case  of  New  York 
since  practically  uniform  accounting  systems  have  been  prescribed. 


138        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

and  the  tax  can  be  computed  by  simple  mathematical  cal- 
culation. Expenses  of  assessment  and  collection  would 
likewise  be  reduced  to  a  minimum,  so  the  tax  would  "take 
out  and  keep  out  of  the  pockets  of  the  people  as  little  as 
possible  over  and  above  what  it  brings  into  the  public 
treasury  of  the  state."  It  conforms,  moreover,  more 
nearly  to  the  American  idea  of  a  just  base  for  taxation — 
property — than  does  net  income.  This  sort  of  a  property 
basis  does  not  tax  a  concern  until  it  has  really  been  es- 
tablished upon  an  operating  basis.  The  tax  would  fluctu- 
ate with  business  conditions ;  it  would  increase  as  business 
prospered  and  become  a  smaller  burden  in  times  of  de- 
pression. It  is  a  tax  admirably  adapted  to  meet  the  vary- 
ing demands  of  the  state  since  it  can  be  easily  modified, 
and  will  automatically  increase  with  the  prosperity  of  the 
state.  The  assessment  upon  which  the  property  tax  is  lev- 
ied, on  the  other  hand,  tends  to  become  stationary.  As 
previously  pointed  out,  this  has  been  particularly  true  in 
New  York. 

Some  think  that  the  gross  earnings  tax  would  work  in- 
justice particularly  in  the  case  of  railroads.  Many,  howev- 
er take  the  opposite  view  while  a  numbr  of  tax  commission 
reports  uphold  such  a  tax.  The  Ontario  commission  in 
1905,  after  making  an  exhaustive  study  of  railroad  taxa- 
tion, said: 

The  gross  earnings  tax  will  cause  no  substantial  inequality  in  the 
roads  operating  in  Ontario,  and  as  regards  equality,  there  is  little 
to  choose  between  the  gross  and  net  basis.  The  choice  would  be 
determined  on  the  ground  of  facility  and  certainty  in  ascertaining 
what  is  gross  and  net  revenue.  There  is  little  dispute  in  determ- 
ining gross  revenue,  while  there  is  endless  dispute  in  dterm- 
ining  net,  especially  where  it  is  to  the  interests  of  the  company  to 
minimize  net  earnings  in  order  to  escape  taxation.  There  is  no 
hesitation  in  selecting  gross  revenue  as  the  simplest  and  most  direct, 
and  considering  all  the  roads  the  most  equitable  basis  of  taxation. 
Earnings  as  a  basis  is  fair  because  taxes  vary  with  the  capacity  of 
a  company  to  pay  them  whereas  taxes  on  general  property  results 
in  all  manner  of  inequality.  The  amount  of  tangible  property  of 
various  corporations  has  no  necessary  relation  to  their  relative 
earning  power  and  bears  no  accurate  relation  to  the  earning  power 
of  the  same  company  at  different  periods.  Only  the  tax  on  earn- 
ings follows  automatically  the  capacity  of  the  corporation  to  pay, 
and  while  it  has  its  enequalities,  it  is  much  more  equitable  than  any 
other  practical  system.  The  tax  has  the  further  advantage  that 
all  the  processes  connected  with  its  operation  are  matters  of  public 
record.     Thus  the  railroad  on  the  one  hand  and  the  government 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  139 

and  public  on  the  other  may  know  exactly  the  basis  of  valuation, 
the  rate  of  tax  and  the  relative  contributions  of  the  tax  payers  in 
proportion  to  their  business.  Where  the  valuation  depends  more 
or  less  absolutely  upon  the  opinion  of  one  or  two  assessors  who  can 
not  be  quite  sure  of  their  own  estimate  either  individually  or  col- 
lectively, it  is  obvious  that  the  most  unusual  power  without  any 
adequate  check  is  placed  in  the  hands  of  one  or  two  men.  Where 
he  has  small  properties  to  estimate  and  where  each  man's  property 
was  known  to  his  neighbor  this  system  had  few  difficult  evils.  But 
where  railroads  and  other  corporations  the  value  of  whose  prop- 
erty is  hardly  known  to  themselves,  are  required  to  pay  millions  of 
dollars  in  taxes  without  any  knowledge  as  to  how  their  own  or 
their  rivals'  assessments  are  made  up,  and  where  the  public  is  nec- 
essarily in  even  more  complete  ignorance  the  opportunity  and  temp- 
tation is  very  great  to  bring  influences  to  bear  upon  the  government 
for  the  appointment  of  favorable  assessors  or  upon  the  assessors 
themselves,  for  a  favorable  valuation.  It  is  not  in  the  interest  of 
pure  politics  or  sound  finance,  and  it  is  certainly  not  fair  either  to 
the  assessment  boards  or  general  public  for  a  system  of  taxation 
to  place  such  enormous  interests  as  the  value  of  many  millions  of 
corporate  property  in  the  hands  of  two  men. 

One  of  the  most  important  advantages  is  that  it  does  away  with 
the  difficulty  of  the  taxing  of  franchises.  Probably  no  aspect  of 
modern  economic  wealth  has  given  rise  .to  such  elaborate  and  confus- 
ed discussion  and  even  outlandish  theorizing  as  the  so-called  "fran- 
chise" values.  It  is  a  confusion  of  the  two  economic  phases  in 
which  "franchise"  is  used  to  indicate  property  value  with  the  oc- 
cassional intoduction  of  legal  aspects  which  has  contributed  so 
much  to  the  darkening  of  counsel  on  the  subject.  Mr.  Thomas  F. 
Woodlock  of  Wall  Street  Journal  reported  to  the  commission  that 
he  favored  a  gross  earnings  tax.  Then  you  cannot  charge  expenses 
for  wholesale  betterments,  etc.  It  may  happen  that  one  road  is 
compelled  to  operate  at  seventy  five  per  cent  of  expenses  and  anoth- 
er at  fifty,  but  the  gross  earnings  are  most  suitable  because  easily 
ascertained.  Mr.  Hugh  L.  Bond,  second  vice-president  of  the  Bal- 
timore and  Ohio  Railroad,  stated  to  the  commission  that  he  thought 
on  the  whole  the  most  equitable  basis  fo  rthe  taxation  of  railroads 
is  the  gross  receipts.89 

This  quotation,  of  course,  applies  in  particular  to  a 
Canadian  country  but  conditions  there  are  not  dissimilar 
to  those  found  in  New  York.  But  we  do  not  have  to 
go  to  Canada  to  find  the  gross  earnings  system  advocated 
and  tried.  The  reports  of  the  tax  commissioners  of  both 
California  and  Minnesota  heartily  indorse  it.  The  Cali- 
fornia commission  in  1906  said  that  it  would  result  in  a 
closer  approximation  to  justice  than  any  other  system 
which  the  state  might  select.  The  burden  would  vary 
with  the  fund  out  of  which  the  taxes  were  to  be  paid. 

89  Report  of  Ontario  Commission  on  Railroad  Taxational  1905. 
Printed  in  State  and  Local  Taxation,  1911. 


140        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

Practical  considerations  naturally  outweighed  theoretical 
ones  and  the  advantages  of  this  tax  were  largely  practi- 
cal.40 The  Minnesota  commission  in  1910  pointed  out  that 
the  greatest  advantage  of  such  a  tax  was  the  elimination  of 
the  necessity  for  valuing  the  complicated  and  peculiar 
properties  of  the  corporation.  Such  valuations  had  been 
inaccurate  and  but  crude  guess  work.  To  even  approxi- 
mate a  fair  value  of  such  property  required  in  each  case 
the  knowledge  and  skill  of  experts.  A  tax  on  gross  earn- 
ings, moreover,  not  only  rendered  taxation  a  mere  mat- 
ter of  mathematical  computation,  but  gave  to  the  system 
a  desirable  certainty  and  reliability.  The  method  was 
the  best  yet  suggested  and  the  practical  experience  of  a 
few  years  would  fix  a  fair  rate.41 

In  191 1  the  Connecticut  legislature  appointed  a  com- 
mittee to  prepare  a  report  on  corporate  taxation.  This 
report  was  made  in  19 13  and,  after  a  thorough  examina- 
tion of  the  other  tax  systems,  recommended  the  adoption 
of  the  gross  earnings  tax.    On  pages  6  and  7  we  find : 

The  tax  on  gross  earnings  avoids  all  the  difficulties  inherent  in 
the  tax  on  net  earnings.  No  corporation  can  do  business  without 
having  accounts  which  will  at  least  show  the  amount  of  its  gross 
earnings.  Gross  earnings  are  a  definite  fact,  ascertained  by  a  glance 
at  the  accounts,  and  incapable  of  argument  or  difference  of  opinion. 
The  tax  on  gross  earnings  can  be  evaded  only  by  perjury  of  the 
most  obvious  sort  and  capable  of  easy  detection.  The  gross  earnings 
tax,  therefore,  has  the  greatest  advantage  of  simplicity,  certainty, 
and  ease  of  administration.  This  is  an  advantage  both  to  the  cor- 
poration and  to  the  state.  The  amount  of  the  tax  on  gross  earn- 
ings fluctuates  with  the  posperity  or  adversity  of  the  business  and 
is  therefore,  just  to  all  parties  concerned.  Moreover,  it  enters 
each  year  into  the  accounts  in  a  definite  ratio,  and  can  thus  be  count- 
ed on  in  advance. 

A  serious  question  remains  to  be  answered.  Will  not  the  tax 
on  gross  earnings  be  distinctly  unfair  on  account  of  the  great  di- 
versity between  different  corporations  in  their  ratios  of  expense  to 
earnings?  The  answer  is  that  such  injustices  is  to  be  avoided  by 
classifying  corporations  according  to  the  prevailing  ratio  of  net 
earnings  to  gross,  and  imposing  different  rates  upon  the  gross  earn- 
ings of  the  different  classes  of  corporations. 

Investigation  shows,  for  instance,  that  the  ratio  of  net  earnings 
to  gross  is  fairly  uniform  for  the  railroads  of  the  country.     In  the 

40  Report  of  California  Tax  Commission,  1920.  Printed  in  State 
and  Local  Taxation,  1911. 

41  Report  of  Minnesota  Tax  Commission,  1910.  Printed  in  State 
and  Local  Taxation,  1911. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  141 

same  way  there  is  a  general  prevailing  ratio  of  net  earnings  to  gross 
fo  rtelephone  companies,  fo  express  companies  ,etc.  Having  de- 
termined what  this  prevailing  ratio  is  for  each  class  of  corporations 
we  are  enabled  to  fix  ratios  fo  reach  class  which  will  make  the  tax 
on  goss  earnings  just  to  all.  It  is  true,  of  course,  that  absolute 
justice  as  between  individual  corporations  of  the  same  class  is  not 

obtained.    The  resulting  injustice  is,  however,  not  great 

Some  inequality  is  unavoidable  but  the  inequality  thus  esulting  is 
distinctly  less  than  can  be  easily  shown  to  result  from  any  of  the 
other  schemes  of  taxation  which  are  before  us.  No  tax  system 
can  be  absolutely  perfect,  and  it  is  not  a  valid  objection  against  a 
proposed  scheme  to  point  out  a  defect  which  is  present  in  even 
greater  degree  in  each  of  the  other  possible  alternative  measures. 

We  conclude,  therefore,  that  the  tax  on  gross  earnings  presents 
distinctively  the  most  advantageous  method  for  the  taxation  of  pub- 
lic service  corporations.42 

The  commissioners  continue,  in  this  report,  to  show 
how  the  classification  shall  be  made,  how  the  ratio  be- 
tween gross  and  net  earnings  shall  be  determined,  and 
give  formulae  for  finding  the  proper  rate  to  be  imposed 
on  the  gross  earnings.  They  hold  that  the  rates  should 
tax  the  different  classes  of  corporations  fairly  as  compar- 
ed with  the  taxation  borne  by  other  forms  of  wealth. 

Other  reports  have  been  favorable  to  the  gross  earn- 
ings tax  and  a  number  of  states  use  it  as  supplementing 
other  taxes.  Different  schemes,  as  suggested  by  the  quo- 
tation we  have  just  given,  may  be  used  to  secure  justice. 
If  a  flat  rate  on  gross  earnings  be  considered  unjust,  the 
remedy  lies  in  classification  of  the  corporations.  No  ob- 
jection could  be  made  to  classification  in  New  York  since 
it  is  used  in  the  present  tax  system.  Classification  may  be 
on  the  basis  of  the  enterprise,  the  relation  of  gross  to  net 
revenue,  or  both.  In  any  departure  from  the  flat  rate 
great  care  should  be  taken  that  greater  inequalities  are 
not  introduced  than  if  a  flat  rate  were  maintained.43 

42  Report  of  the  Special  Commission  on  Taxation  of  Corporations, 
State  of  Connecticut,  1913. 

**An  interesting  scheme  for  assessing  the  gross  earnings  tax  has 
been  proposed  by  Mr.  Allen  Ripley  Foote,  ex-president  of  the  Nat- 
ional Tax  Association.  He  proposes  a  flat  rate  on  gross  operat- 
ing revenue,  plus  a  differential  on  the  margin  of  difference  between 
operating  revenue  and  operating  expenses.  He  would  make  this 
a  substitute  for  all  other  kinds  of  taxes.  Such  a  scheme,  he  thinks, 
combines  both  the  principles  of  the  property  and  income  tax  which 
would  satisfy  the  advocates  of  each  of  these  systems  while  justice 
would  be  given  to  the  corporations.     He  proposes  that  a  flat  rate 


142        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

In  spite  of  this  wide  advocacy  and  apparent  success  of 
the  gross  earnings  tax,  we  must  admit  that  it  has  serious 
difficulties.  Gross  receipts  do  not  represent  earning  ca- 
pacity, and  it  is  earning  capacity  that  makes  a  concern 
valuable  and  able  to  pay  taxes.  It  is  what  a  concern  has 
left  after  expenses  are  paid  that  spells  success  or  failure. 
The  gross  returns  of  two  street  railway  concerns  for  ex- 
ample, might  be  the  same,  while  the  net  returns  might 
be  such  as  to  make  one  a  success  and  the  other  a  failure. 
The  one  might  be  working  under  auspicious  circumstanc- 
es— short  lines,  heavy  traffic,  level  streets,  etc. — while 
the  other  would  have  the  opposite  conditions.  Similar 
conditions  are  found  in  varying  degree  in  all  classes  of 
public  utility  corporations  and  it  is  too'  much  to  suppose 
that  any  system  of  classfication  can  properly  take  them 
into  account.  The  tax,  then,  will  to  a  greater  or  less  de- 
gree be  ununiform  as  between  corporations,  to  say  noth- 
ing of  its  relation  to  other  taxes. 

The  experience  of  Michigan  and  Wisconsin,  moreover, 
would  tend  to  weaken  our  faith  in  the  adequacy  of  the 
gross  earnings  tax.  Both  states  have  given  it  a  thorough 
trial  and  have  thrown  it  over-board.  Wisconsin  had  the 
system  for  nearly  fifty  years,  but  gave  it  up  in  1902.  The 
reasons  assigned  by  the  officials  of  both  states  for  this 
failure  to  give  satisfaction  were  practically  the  same. 
Uniformity  could  not  be  secured  between  the  corporations 
and  there  was  no  relation  between  the  tax  paid  on  cor- 
porate property  and  on  other  property.  The  governors 
under  whose  administration  the  gross  earnings  tax  was 
given  up,  had  pledged  themselves  to  equality  in  taxation. 

It  is  contended  by  some,  however,  that  a  tax  based  up- 

of  two  per  cent  be  assessed  on  the  gross  operating  revenue  of  all 
corporations  regardless  of  the  margin  of  difference  between  their 
total  revenue  and  total  operating  expenses.  This  is  to  be  paid  by 
all  corporations  whose  operating  expenses  are  ninety  per  cent  or 
more  of  operating  revenue.  To  this  is  to  be  added  a  differential  of 
one-sixthteenth  of  one  per  cent  computed  on  each  one  per  cent  in- 
crease in  the  margin  of  difference  between  total  revenue  and  total 
operating  expenses  in  excess  of  ten  per  cent.  Theoretically  such  a 
method  would  obtain  a  reasonable  amount  of  justice,  but  the  prac- 
tical difficulties  in  determining  the  differential  would  no  doubt  de- 
feat the  end  intended. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  143 

on  net  earnings  will  do  more  towards  obtaining  justice 
and  equality  than  can  a  gross  earnings  tax.  Net  earn- 
ings can  be  used,  either  as  the  direct  basis  for  the  tax  or 
as  the  basis  for  finding  the  value  of  the  company.  If  the 
capitalized  net  earnings  be  taken  as  the  proper  valuation 
of  a  concern  then  no  account  need  be  taken  of  capital  that 
may  have  been  issued  and  squandered,  the  different  forms 
of  stock  exchange  manulipulation  or  the  watered  stock  a 
company  may  have.  The  factor  under  consideration  is 
what  the  enterprise  is  worth  as  a  productive  agent  or  as 
a  going  concern.  The  original  cost  and  cost  of  reproduc- 
tion are  not  the  controlling  items  which  determine  value ; 
that  is  determined  by  the  one  characteristic — power  to 
bring  in  a  money  return  over  and  above  expenses.  The 
captalized  net  income  would  most  nearly  correspond  to 
what  a  purchaser  would  be  willing  to  pay  at  a  natural 
sale — and  this  the  courts  have  held  to  be  the  value  of 
property. 

Mr.  W.  S.  Stevens,  a  member  of  the  New  York  Public 
Service  Commission,  expressed  the  opinion  that  the  net 
earnings  tax  was  the  one  tax  that  would  have  the  support 
of  basic  principle.    To  quote : 

An  inquiry  into  the  value  of  railroad  property  as  a  whole  is  an 
investigation  of  the  question  how  much  will  any  person  or  collec- 
tion of  persons  desire  to  possess  the  property,  and  how  much  money 
or  other  things  will  they  be  willing  to  part  with  for  the  sake  of 
such  possessions.  The  difficulty  attending  the  investigation  is:  1. 
The  property  has  never  been  bought  or  sold  so  there  is  no  direct  test 
or  evidence  of  its  ratio  of  exchange  for  money  or  other  things ;  2. 
It  is  not  one  of  a  class  of  things  which  is  bought  or  sold  with  such 
frequency  or  under  such  circumstances  as  to  afford  a  fair  test  of 

what  it  would  be  likely  to  bring  upon  exchange  or  sale 

The  only  course  open  to  the  investor  is  to  select  those  attributes 
which  in  his  judgment  would  create  a  desire  for  the  propety,  and 
then  estimate  how  much  that  desire  would  induce  a  prospective  pur- 
chaser to  surrender  for  its  satisfaction Its  one  charac- 
teristic which  gives  it  value  is  its  supposed  power  to  yield,  directly 
or  indirectly,  a  moneyed  return  equal  to  the  investment  with  a 
profit  thereon.  Its  value  lies  not  in  what  it  is  but  in  what  it  will 
produce  or  what  it  is  believed  it  will  poduce  in  money.  This  is 
the  essential  proposition  upon  which  all  depends.  Generally  speak- 
ing, what  it  will  produce  in  money  will  depend  upon  its  earning 
power,  directly  or  indirectly.  To  the  ordinary  investor  it  is  its 
direct   earning   power   as    shown  by   the   excess   of    revenues   over 

expenses .       This    fundamental   consideration 

indicates    that    the    net    earnings    rule,    when    properly    and    care- 


144        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

fully  applied  with  due  regard  to  all  the  features  of  the  individual 
case  is  probably  the  one  having  the  surest  support  of  basic  principle. 
It  is  also  the  one  which  accords  with  the  practice  of  shrewd,  broad- 
minded  and  successful  men  of  business.44 

In  spite  of  the  apparent  logical  and  theoretical  sound- 
ness of  net  earnings  as  a  tax  basis,  many  practical  diffi- 
culties are  met  in  its  administration.  One,  which  has 
proved  most  troublesome,  is  in  determining  the  true  net 
earnings.  Accounting  systems  have  been  anything  but 
uniform,  and  no  comparison  could  be  had  between  net 
earnings  of  different  enterprises.  This  applies,  however, 
with  little  force  to  New  York  since  in  recent  years  practic- 
ally uniform  accounting  systems  have  been  arranged  for 
public  utility  corporations.  Even  with  uniform  account- 
ing the  difficulty  might  still  remain  of  separating  the 
earnings  of  the  utility  company  from  those  of  its  invest- 
ments or  subsidiary  undertakings.  Neither  would  the 
system  secure  equality  in  assessment  between  public  util- 
ity companies  and  other  forms  of  taxable  property.  The 
difficulties  which  Wisconsin  and  Michigan  found  with 
the  gross  earnings  tax  would  be  magnified  here.  A  man's 
farm  and  buildings  are  taxed  even  though  they  are  pro- 
ducing no  more  than  expenses.  Yet  a  railroad  with  an 
investment  of  several  million  dollars  would  not  be  taxed 
until  it  became  operative  to  the  extent  of  having  a  sur- 
plus above  expenses.  Because  of  the  fluctuation  of  earn- 
ings, the  amount  of  the  tax  could  not  be  counted  upon 
as  being  in  any  degree  stable. 

The  special  commission  which  reported  to  the  Connec- 
ticut legislature  in  191 3  in  favor  of  the  gross  earnings 
tax  characterized  the  net  earnings  tax  as  follows : 

To  avoid  serious  inequality  and  evasion  the  tax  on  net  earnings 
would  require  for  administration  a  thorough  examination  into  the 
accounts  of  every  corporation  taxed,  together  with  strict  rules  as 
to  how  these  accounts  should  be  kept.  ...  It  would  be  a  con- 
tinual source  of  irritation  between  the  corporation  and  the  taxing 
officials.  It  would  involve  the  most  disagreeable  inquisition  into 
the  accounts  and  business  of  the  corporations,  and  in  the  end  there 
would  still  remain  room  for  personal  judgment,  thus  leaving  open 

the  door  to  political  intrigue  and  corrupt  influence The 

practical  difficulties  in  the  way  of  imposing  a  tax  upon  net  earn- 
ings seem  overwhelming.    A  further  objection  arises  from  the  fact 

44  Quoted  in  State  and  Local  Taxation,  1912,  p.  194. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  145 

that  a  corporation  might  have  no  net  earnings  whatever  in  a  given 
year,  and  therefore  escape  taxation  entirely.  While  it  is  true  that 
this  might  be  perfectly  just  under  a  tax  system  based  fundamentally 
upon  income,  we  should  bear  in  mind  that  the  American  tax  sys- 
tem is  today  based  upon  property.  The  individual  whose  property 
has  yielded  him  no  income  in  a  given  year  cannot  offer  that  as  a  rea- 
son why  he  should  not  pay  taxes  upon  his  property.  While  the  import- 
ance of  treating  corporations  and  individuals  upon  the  same  foot- 
ing must  not  be  stretched,  there  can  be  little  doubt  that  a  tax  sys- 
tem which  would  allow  corporations  having  no  net  earnings  to  es- 
cape taxation  entirely  would  be  out  of  harmony  with  the  general 
tax  system  prevailing  in  America.43 

The  objections  to  the  ad  valorem  basis  for  taxing  public 
utilities  are  due  largely  to  misunderstanding  of  the  term, 
and  to  the  discrepancies  which  have  arisen  in  attempting 
to  apply  different  methods  of  valuation.  As  now  used, 
an  ad  valorem  tax  means  a  tax  based  upon  the  value  of 
a  public  utility  as  a  piece  of  property  rather  than  as  divid- 
ed up  into  different  elements.  The  system  further  im- 
plies a  more  or  less  expert  valuation  of  the  corporation 
property  by  some  centralized  state  board. 

The  discrepancies  have  arisen  because  of  the  limited 
powers  of  the  assessors,  or  because  too  few  factors  have 
been  taken  into  account  in  arriving  at  the  valuation.  One 
particularly  troublesome  feature  has  been  to  secure  the 
value  of  the  so-called  franchise.  The  excess  value  of  the 
stocks  and  bonds  over  the  value  of  the  real  estate  has  been 
suggested  as  the  value  of  the  franchise.  The  average 
selling  price  of  securities  for  a  period  of  years  is  taken 
as  the  value.  This  is  done  in  order  to  take  account  of  any 
fluctuations  due  to  seasonal  disturbances  or  stock  ex- 
change manipulations.  The  greatest  difficulty  is  perhaps 
in  application.  Thus  the  Michigan  Tax  Commissioners 
point  out  the  difficulties  which  they  encountered : 

But  as  far  as  applying  this  theory  to  all  the  railroads  in  Michigan 
was  concerned,  it  was  found  to  be  impracticable  from  the  fact  that 
the  stocks  and  bonds  of  but  comparatively  few  of  the  railroads 
were  quoted  in  the  market,  that  the  stocks  and  bonds  of  many  of  the 
railroads  were  unknown  to  the  open  market,  and  the  method  could 
be  applied  only  to  the  few  railroads.  Then,  too  the  computation  of 
the  bond  value  is  rendered  intricate  and  uncertain  by  reason  of  the 
fact  that  there  may  be  several  different  issues  of  bonds  issued  by 
a  company  upon  different  portions  of  its  line  or  upon  the  same  por- 

45  Report  of  Special  Commission  on  Taxation  of  Corporations* 
Connecticut,  1913.    Page  35. 


146        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

tion  of  its  line;  or  the  issue  may  have  been  made  at  a  certain  time 
covering  the  whole  line,  since  which  time  the  line  may  have  been 
extended  without  it  appearing  how  the  issue  is  affected,  or  in  what 
manner. 

Another  difficulty  encountered  in  attempting  to  apply  the  stock 
and  bond  method  in  determining  the  value  of  railroads  lies  in  the 
separation  of  railroad  property  devoted  to  operation  from  the  prop- 
erty owned  by  the  railroad  but  not  used  in  its  operation.  The  stocks 
and  bonds  of  a  railroad  company  represent  the  value  of  all  the  prop- 
erty of  that  company  whether  devoted  to  operation  or  not ;  manufac- 
turing plants,  mines,  elevators,  etc And  when  we  con- 
sider, in  addition  to  the  intricacy  and  uncertainty  of  the  computa- 
tion of  stock  and  bond  values,  the  manipulation  by  stock  brokers, 
regardless  of  the  many  conditions  that  affect  the  price  or  value  of 
the  stocks  and  bonds  regardless  of  the  real  value  of  the  property 
itself,  we  cannot  but  appreciate  the  incompetency  and  unreliability 
of  the  system.46 

This  criticism  is  made  to  the  application  of  the  stock 
and  bond  method  for  valuing  railroads  but  it  is  applicable 
in  varying  degree  to  public  utilities.  Administrative  diffi- 
culties have  likewise  arisen  in  the  attempt  to  find  the 
value  from  earnings,  initial  cost,  or  reproduction  cost. 
The  item  that  is  a  determining  factor  with  one  concern 
may  be  unimportant  for  another.  The  report  of  the  Con- 
necticut Special  Tax  Commission  which  advocated  the 
adoption  of  the  gross  earnings  tax,  characterized  the  ad 
valorem  basis  as  follows : 

To  be  properly  performed  it  requires  the  work  of  a  large  force 
of  experts  familiar  with  the  technical  details  of  the  business  of  the 
corporations  concerned.    At  best  the  element  of  personal  judgment 

is  sure  to  enter Besides  practical  difficulties,  important 

theoretical  questions  arise.  In  the  majority  of  cases  there  is  and 
can  be,  no  such  thing  as  an  actual  sale  of  the  property  of  a  public 
service  corporation.  The  selling  price  is,  therefore,  unavailable  as 
a  basis  of  valuation.  Shall  the  appraisal,  then,  seek  to  determine 
the  original  cost  of  the  property  or  the  cost  of  replacement,  and 
if  the  latter,  shall  allowance  be  made  for  the  present  condition  due 
to  depreciation?  ....  Another  difficulty  with  this  method  is 
its  rigidity.  Valuations  when  once  made  are  very  likely  to  remain 
for  a  considerable  number  of  years  without  serious  revision.  This 
is  caused  partly  by  the  very  fact  of  the  difficulty  and  expense  in- 
volved in  a  thorough-going  valuation.  As  a  result,  such  valuations, 
no  matter  how  successfully  made  at  the  start,  very  soon  come  to 
the  unreliable.'17 

We  note,  however,  the  attitude  of  Wisconsin,  Mich- 

4*  Report  of  Board  of  State  Tax  Commissioners,  Michigan,  1909- 
1910.  P.  55. 

47  Report  of  Special  Commission  on  Taxation  and  Corporations, 
Connecticut,  1913,  page  2. 


RAILROADS  AND  OTHER  PUBLIC  SERVICE  CORPORATIONS  147 

igan,  and  Virginia  to  the  ad  valorem  basis,  we  must  ques- 
tion that  it  is  wholly  bad.  Wisconsin,  as  we  have  seen, 
gave  up  the  gross  earnings  tax  in  its  favor  and  that,  too, 
after  the  courts  had  stretched  the  constitution  to  declare 
the  legality  of  the  former.  The  attitude  can  be  seen  from 
the  following  extract  from  the  report  of  the  Wisconsin 
Tax  Commission  for  19 10: 

By  substantially  uniform  ad  alorem  methods  a  nearer  approach 
can  be  made  to  equality  in  tax  burdens  as  between  the  different 
classes  of  public  utilities,  and  as  between  them  and  general  property, 
than  seems  practicable  by  resort  to  earnings  as  the  basis  of  taxa- 
tion. A  tax  based  upon  earnings  at  fixed  rates  involves  the  problem 
of  ascertaining  rates  which  are  just  and  which  will  accomplish  sub- 
stantial equality  of  burden  with  property  taxed  by  other  methods. 
.  .  .  .  In  respect  to  most  of  the  property  employed  in  the  various 
public  service  enterprises  now  under  consideration  such  method 
seems  fairly  well  adapted  if  the  work  of  assessment  is  committed 
to  officers  having  facilities  for  obtaining  the  necessary  data  and 
who  are  fairly  qualified  to  make  intelligent  and  impartial  valua- 
tions.48 

The  attitude  of  the  Michigan  Tax  Commissioners  is 
very  similar  to  that  taken  in  Wisconsin.  In  a  report 
to  the  Governor  in  19 14,  moreover,  the  Virginia  Joint 
Committee  on  Tax  Revision,  after  a  careful  analysis  of 
different  tax  bases,  says :  "We  believe  that  under  an  ad 
valorem  system  administered  by  a  competent  board  un- 
trammelecl  by  any  single  prescribed  standard  or  rule,  it 
is  easier  to  establish  justice  in  taxation  than  under  any 
other  method.49 

It  would  seem,  then,  that  the  success  or  failure  of  the 
ad  valorem  tax  to  secure  justice  depends  upon  the  com- 
petency of  the  assessing  board,  and  the  extent  of  power 
conferred  upon  it.  We  would  consider  it  absurd  to  send 
a  man  or  group  of  men  to  value  a  carriage  who  had  spent 
their  life  as  sailors.  And  we  would  consider  it  just  as 
absurd  to  instruct  men  who  were  competent  to  determine 
the  value  of  a  carriage,  to  arrive  at  such  value  by  taking 
into  consideration  only  the  wheels,  or  bed,  or  pole,  or  top. 
A  particular  carriage  might  have  no  top,  or  shafts  instead 
of  pole,  or  the  wheels  might  be  newly  painted,  so  that  no 

48  Report  of  Wisconsin  Tax  Commission,  1910,  page  52. 

49  Report  of  the  Joint  Committee  on  Tax  Revision,  Virginia,  1914, 
page  138. 


148        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

one  of  these  could  be  taken  as  the  determining  factor  in 
its  value.  Likewise  they  should  be  allowed  to  ex- 
amine the  spindles  and  tires  to  see  how  much  they  were 
worn — in  short  take  all  parts  into  consideration  to  de- 
termine its  value.  So,  in  finding  the  value  of  a  public 
utility,  not  only  must  we  have  a  competent  board,  but  it 
must  have  broad  powers.  It  must  be  allowed  to  consider 
all  the  factors  which  may  contribute  to  its  value — fran- 
chise, reproduction  cost,  earnings,  etc.  Not  only  must 
it  be  given  power  to  consider  all  these  items,  but  it  must 
be  given  access  to  them.  In  order  to  efficiently  carry  on 
its  work,  the  books,  accounts,  and  records  of  the  compan- 
ies must  be  placed  at  its  disposal.  It  should  be  empow- 
ered to  examine  witness  and  require  reports — in  short 
given  every  possible  privilege  which  will  enable  it  to  make 
a  proper  valuation.  Where  we  have  this  combination — 
a  competent  board  with  extensive  powers — the  prevalent 
objections  to  the  ad  valorem  basis  for  taxation  are  great- 
ly minimized. 

A  tax  on  earnings,  moreover,  is  not  such  an  out  and  out 
departure  from  a  tax  on  value  as  it  at  first  would  seem. 
When  we  do  not  regulate  the  charges  for  services  there 
may  be  no  definite  relation  between  the  property  in  use 
by  plant  and  its  earnings ;  but  we  have  adopted  the  policy 
of  so  regulating  the  charges  made  by  public  utilities  that 
the  net  earnings  shall  represent  but  a  fair  return  on  the 
value  of  the  enterprise.  Of  course  there  is  no  absolute 
rule  for  determining  the  value  upon  which  earnings  shall 
be  allowed,  and  it  is  impossible  to  determine  value  so  ex- 
actly or  to  fix  rates  so  accurately  in  each  particular  case 
that  a  fair  return  will  just  be  realized.  But  the  more 
nearly  this  is  approximated  the  more  nearly  will  a  tax 
on  earnings  correspond  to  one  on  value.  It  could  make 
little  difference  in  a  case  of  perfect  valuation  and  regula- 
tion of  charges,  where  ten  per  cent  were  allowed  as  a  fair 
return,  whether  ten  percent  of  the  net  earnings  were 
taken  or  one  per  cent,  of  the  valuation.  Because  of  the 
indefinite  relation  between  net  and  gross  returns,  however, 
there  could  not  be  this  close  approximation  between  a 
gross  earnings  tax  and  a  tax  on  value  even  if  regulation 


RAILROADS  AND  OTH ER  PUBLIC  SERVICE  CORPORATIONS  149 

could  be  such  as  to  allow  just  a  fair  return.  Yet  they 
more  nearly  correspond  than  under  a  system  of  no  regula- 
tion. 

Justice  in  tax  reform  is  a  relative  rather  than  absolute 
expression.  We  cannot  hope  for  absolute  justice  between 
corporations  or  between  corporate  property  and  other 
property.  But  there  is  no  reason  why  it  should  not  be 
more  nearly  approximated  in  New  York  than  at  present. 
The  substitution  of  either  an  earnings  tax  or  a  tax  on 
value,  notwithstanding  the  difficulties  connected  with 
each,  would  prove  more  satisfactory  than  the  present 
combination  of  franchise,  earnings,  and  dividend  taxes. 
Such  action  would  mean  a  change  from  the  present  com- 
plexity to  comparative  simplicity.  Corporations  would 
at  least  know  upon  what  they  were  being  taxed,  and  could 
more  nearly  anticipate  their  tax  burdens.  Simplicity 
would  bring  intelligent  publicity,  with  greater  ease  in  ob- 
taining justice  among  the  public  utility  enterprises  them- 
selves, and  between  the  taxes  assessed  to  such  companies 
and  those  laid  upon  other  taxable  property.  Centraliza- 
tion of  the  assessing  authority  would  facilitate  checking 
up  any  discrepancies  that  might  exist.  In  short,  it  would 
make  for  uniformity  and  fairness,  and  where  this  has  been 
accomplished  it  has  been  found  that  corporation  officials 
were  willing  to  cooperate  with  taxing  officials  to  secure 
efficient  enforcement  of  the  law. 

If  the  system  of  taxing  public  service  corporations  for 
state  purposes  needs  reform,  the  system  for  taxing  them 
locally  needs  it  doubly.  The  incongruities  depicted  by 
the  Special  Tax  Commission  in  187149  still  remain.  Re- 
form might  be  secured  by  the  entire  abolition  of  local  as- 
sessment of  public  utility  property50  if  the  localities  could 
be  made  to  see  that,  by  so  doing,  they  would  not  be  the 
losers,  and  the  legislators  could  be  made  to  see  that  great- 
er equality  would  be  secured  thereby.  It  would  seem  ad- 
visable that  some  centralized  authority  should  have  in 
charge,  at  least,  the  assessment  of  those  companies  whose 
plants  extend  into  several  districts. 

■  See  above  p.  126. 

"  This  is  of  course  on  the  assumption  that  the  courts  would  uphold 
the  constitutionality  of  such  a  change. 


1 50        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

If  some  form  of  unit  assessment,  however,  be  adopt- 
ed for  determining  the  state  taxes,  reform  in  securing 
local  revenue  from  these  same  enterprises  could  be  accom- 
plished with  litttle  added  burden  or  expense.  The  amount 
intended  for  local  purposes  could  be  added  to  the  state 
assessment  and  then  distributed  to  the  districts.  The 
difficulty  arises,  of  course,  in  choosing  a  basis  for  distri- 
bution. This  could  be  made  in  proportion  to  the  amount 
of  trackage  in  the  dstrict,  the  amount  of  property  located 
there,  or  the  amount  of  business  arising  within  its  bord- 
ers. From  many  standpoints  the  first  of  these  has  advan- 
tages. Where  the  business  is  greatest,  the  main  lines  are 
not  only  duplicated,  but  are  supplemented  by  side  tracks 
and  switches.  If  it  were  considered  that  justice  so  de- 
manded, the  main  lines  and  side  tracks  could  be  counted 
as  having  different  importance. 

Such  allocation  would  rarely  be  needed  except  in  the 
case  of  transportation  and  transmission  companies.  If  a 
property  basis  were  taken  it  would  introduce  the  necessity 
for  local  valuations  and  the  possibility  for  inequality. 
The  tendency,  no  doubt,  would  be  towards  high  valua- 
tion since  the  higher  the  value  of  the  property  in  the  dis- 
trict, the  more  tax  it  would  receive. 

Because,  then,  of  the  complexities  of  the  present  sys- 
tem of  taxing  public  utility  corporations,  because  of  the 
discrepancies  and  inequalities  which  exist,  not  only  be- 
tween the  different  corporations  but  between  the  assess- 
ment of  the  corporate  property  and  other  property,  we 
conclude  that  reform  is  needed.  In  the  light  of  exper- 
ience from  other  states  we  believe  a  unit  method  of  as- 
sessment by  central  authority,  either  upon  earnings  or 
value,  would  be  a  marked  advance  over  the  present  sys- 
tem. Finally,  the  system  would  more  nearly  approximate 
justice  if  the  local  revenue  from  public  utilities  were  ap- 
portioned by  central  authorities  to  districts,  perhaps  on 
the  basis  of  total  trackage  found  therein. 


CHAPTER  VIII 

THE  SPECIAL  TAXATION  OP  PUBLIC  SERVICE  CORPORATIONS 

There  is  probably  no  part  of  the  New  York  system 
of  taxation  which  has  been  more  widely  discussed  than 
the  so-called  "Ford  Special  Franchise  Tax."  Although 
Senator  John  Ford  was  sponsor  for  the  statute,  the  person 
primarily  responsible  for  its  enactment  was  Theodore 
Roosevelt,  then  Governor  of  the  State.  In  his  first  mess- 
age to  the  legislature  Governor  Roosevelt  condemned  the 
existing  system  in  general  terms.1  In  his  special  message 
of  March  27,  1899,2  he  went  further,  committing  himself 
to  a  reform  of  corporate  taxation : 

It  is  true  that  a  corporation  which  derives  its  powers  from  the 
state  should  pay  to  the  state  a  just  percentage  of  its  earnings  as  a 
return  for  the  privileges  it  enjoys.  This  should  be  especially  true 
for  the  franchise  bestowed  upon  gas  companies,  street  railways  and 
the  like.  The  question  of  municipal  ownership  of  these  franchises 
cannot  be  raised  with  propriety  until  the  governments  of  all  munic- 
alities  show  greater  wisdom  than  has  been  recently  shown  in  New 
York  City.  ...  I  need  not  point  out  that  in  foreign  communities 
a  very  large  percentage  of  the  taxes  comes  from  corporations  which 
use  the  public  domain  for  pipes,  tracks  and  the  like.  Whether  these 
franchises  should  be  taxed  as  realty;  or  whether  it  would  be  wiser 
to  provide  that,  after  the  gross  earnings  equal,  say  ten  per  cent  of 
the  actual  original  cost,  then  five  per  cent  of  all  earnings  over  and 
above  this  shall  be  paid  into  the  city  treasury;  or  whether  some 
yet  different  plan  should  be  tried  can  only  be  settled  after  a  careful 
examination  of  the  whole  subject.  One  thing  is  certain,  that  the 
franchise  should  in  some  form  yield  a  moneyed  return  to  the  gov- 
ernment. 

1  Governor  Roosevelt's   Message,  Jan.  4,    1899.     With   regard   to 
taxation  he  said  in  part:     "At  present  our  system  of  taxation  is  in 

utter  confusion,   full  of  injustice  and  queer  anomolies We 

should  discourage  the  building  up  of  non-taxable  interests  yet  we 
should  discourage  driving  property  out  of  the  state  by  unwise  taxa- 
tion or  levying  a  tax  which  is  in  effect  largely  a  tax  upon  honesty. 
I  most  earnestly  commend  the  whole  matter  to  your  special  atten- 
tion." 

2  Governor  Roosevelt's  Special  Message,  House  Journal,  1899,  Vol. 
2,  p.  186. 

151 


1 52        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

Governor  Roosevelt,  in  this  message,  suggested  that 
there  be  some  general  scheme  of  taxation  applying  to  all 
public  service  companies.  He  asked  for  a  joint  committee 
of  the  senate  and  assembly  to  investigate  the  subject  in 
full  and  report  to  the  next  legislature.  He  asked  for  a 
legislative  commission  because,  he  said,  it  had  been  the 
almost  universal  experience  that  however  excellent  the  re- 
ports made  by  special  non-legislative  tax  commissions,  the 
legislatures  paid  little  or  no  heed  to  them.  Shortly  after 
this  message  was  made  public,  Senator  Ford  introduced 
his  bill  for  taxing  franchises.  The  bill  passed  the  Senate 
by  the  vote  of  33  to  11.  Strenuous  opposition,  however, 
developed  in  the  Assembly,  and  Governor  Roosevelt 
found  it  necessary  to  exert  pressure  to  secure  the  passage 
of  the  bill.  When  it  seemed  on  the  verge  of  defeat  he 
sent  the  following  special  message : 

It  appearing  to  my  satisfaction  that  the  public  interests  demands 
it,  therefore  in  accordance  with  the  provision  of  section  15,  article 
3  of  the  constitution  and  by  virtue  of  the  authority  thereby  con- 
ferred upon  me,  I  do  hereby  certify  to  the  necessity  of  the  imme- 
diate passage  of  Senate  Bill  1102  entitled,  An  Act  to  amend  the  tax 
law  relating  to  the  taxation  of  public  franchises  as  real  property.4 

This  message  was  not  read  in  the  assembly.  As  soon 
as  the  governor  discovered  this  he  sent  another  special 
message : 

I  learn  that  the  emergency  message  which  I  sent  last  evening  to 
the  assembly  on  behalf  of  the  franchise  tax  has  not  been  read.  I 
therefore  send  hereby  another  message  upon  the  subject.  I  need 
not  press  upon  the  assembly  the  need  of  passing  this  bill  at  once. 
It  has  been  passed  by  an  overwhelming  vote  in  the  senate.  A  large 
majority  of  the  assembly  have  signed  a  petition  asking  that  it  be 
put  through.  It  establishes  the  principle  that  hereafter  corpora- 
tions holding  franchises  from  the  public  shall  pay  their  just  share 
of  the  public  burden.  It  is  too  late  to  try  to  amend  or  perfect  the 
bill,  even  should  such  amendment  or  improvement  be  deemed  de- 
sirable. It  is  one  of  the  most  important  measures  (I  am  tempted 
to  say  the  most  important  measure)  that  has  been  before  the  legis- 
lature this  year.  I  cannot  too  strongly  urge  its  immediate  pass- 
age.8 

There  could  be  no  uncertainty  as  to  the  meaning  of 
this  message.     On  the  last  day  of  the  session  the  bill  was 

4  Roosevelt's  Message,  April  27,  1899,  Public  Papers  of  Governor 
Roosevelt,  1899,  p.  88. 

5  Governor  Roosevelt's  Message  to  the  Assembly,  April  28,  1899, 
Public  Papers  of  Governor  Roosevelt,  1899,  p.  89. 


SPECIAL  TAXATION  OF  PUBLIC  SERVICE  CORPORATIONS  153 

passed  and  then  came  before  the  Governor  for  his  sig- 
nature. Vigorous  opposition  developed  and  glaring  de- 
fects were  pointed  out.  The  most  weighty  objections 
were,  first,  that  local  assessors  could  not  approximate 
equality  in  assessing  franchise  and,  second,  that  the  addi- 
tion of  this  tax  to  the  special  taxes  already  imposed  by 
some  municipalities  on  franchise  would  constitute  heavy 
double  taxation.  Governor  Roosevelt  refused  to  veto 
the  bill,  thus  allowing  the  matter  to  wait  over  until  the 
next  session  of  the  legislature.  Instead  he  called  a  special 
session  to  secure  satisfactory  amendments. 

When  the  legislature  convened  the  Governor  sent  it  a 
lengthy  message  dealing  with  the  matter.  He  reiterated 
much  that  he  had  said  before,  and  again  emphasized  the 
importance  of  franchise  taxation.  He  did  not  intend,  he 
said,  to  oppress  people  who  had  put  their  money  into  the 
use  of  the  city's  or  the  state's  real  estate  which  made  the 
franchise  valuable.  If  it  were  worth  little,  it  should  be 
taxed  little;  if  of  great  value  it  should  be  heavily  taxed. 
He  was  convinced  that  the  opposition  to  the  bill  before 
him,  was  directed  not  so  much  against  its  particular  fea- 
tures as  against  the  general  principle  of  taxing  franchises. 
Because  of  the  determination  of  the  interests  affected  to 
defeat  franchise  taxation,  he  deemed  it  necessary  to  se- 
cure statuatory  recognition  of  this  principle  at  that  session 
of  the  legislature.  For  this  reason  he  justified  his  special 
message  to  which  its  passage  was  due.  The  bill  as  it 
stood  represented  a  long  stride  in  the  right  direction,  and 
the  ground  thus  gained  must  be  held.  In  the  essential 
feature — taxing  franchises  as  realty — the  measure  was 
right.  In  two  important  particulars,  however,  he  asked 
for  amendment.  One  was  to  entrust  the  work  of  assess- 
ment to  the  State  Board  of  Tax  Commissioners ;  the  other 
was  to  allow  deductions  for  any  franchise  taxes  paid  a 
corporation  to  a  municipality  or  other  local  unit.  A  few 
companies,  he  pointed  out,  already  paid  in  this  way  as 
much  as  five  per  cent  on  gross  earnings.6 

That  the  legislature  would  adopt  the  proposed  amend- 

•  Governor  Roosevelt's  Message,  May  22,  1899.  Public  Papers 
of  Governor  Roosevelt,  1899,  p.  102. 


1 54        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ments  was  not  a  foregone  conclusion.  Some  members  of 
the  legislature,  including  the  author  of  the  bill  himself, 
objected  to  the  amendments  while  others  resented  the  use 
of  executive  pressure.  Senator  R.  H.  Mitchell  probably 
expressed  the  attitude  of  a  member  when  he  said:  "The 
governor  is  up  against  it.  He  issues  an  ultimatum  to  the 
legislature  defining  just  what  sort  of  a  bill  he  will  accept. 
I  believe  that  a  majority  of  the  members  of  the  legislature 
will  go  to  Albany  determined  not  to  do  what  he  demands 
just  to  show  him  that  they,  and  not  he,  constitute  the  law- 
making power."7 

But  the  real  question  before  the  legislature  was  not 
merely  whether  the  law  would  be  improved  by  the  pro- 
posed amendments.  The  governor  had  made  it  plain  that 
unless  the  amended  bill  were  in  his  hands  before  May  2.7, 
he  would  sign  the  act  as  it  was  before  him. 

The  amendments  undoubtedly  bettered  the  measure  and 
and  to  adopt  them  seemed  the  preferable  alternative.  This 
the  legislature  did  May  26,  1899.  That  the  Governor 
took  upon  himself  the  credit  for  the  measure  is  plain  from 
his  utterance  subsequent  to  its  passage.8 

The  provisions  of  law9  are  substantially  as  follows. 
Under  the  term  land  or  real  estate  are  included  the  value 
of  all  franchises,  rights  or  permissions  to  construct,  main- 
tain or  operate  in,  under,  above  or  through  the  streets 
highways  or  public  places.  Such  franchises  are,  for  the 
purposes  of  taxation,  to  be  known  as  special  franchises, 
and  are  further  defined  so  as  to  include  the  value  of  tangi- 
ble property  situated  in  such  places  and  used  in  connection 
with  a  special  franchise. 

The  Board  of  Tax  Commissioners  are  annually  to  de- 
termine the  valuation  of  each  special  franchise.     They 

7  New  York  Times,  May  6,  1899. 

8  In  a  speech  at  the  Johnstown  Fair  he  said :  " the  men  in 

the  legislature  from  whom  I  obtained  the  most  aid  in  pushing 
through  the  franchise  tax  act It  required  boldness  of  ac- 
tion to  get  it  through  the  legislature,  but  it  could  not  be  passed  in 
any  other  way.  The  qualities  of  courage,  of  boldness  and  of  com- 
mon sense  have  got  to  be  shown  in  passing  any  real  legislative 
measure  which  has  to  meet  a  powerful  opposition." — New  York 
Tribune,  September  7,  1899. 

9New  York  Statutes,  1899,  Chap.  712. 


SPECIAL  TAXATION  OF  PUBLIC  SERVICE  CORPORATIONS  155 

must  file  with  the  clerk  of  the  assessment  district  a  writ- 
ten statement  of  this  valuation,  not  less  than  ten  nor  more 
than  thirty  days  before  an  annual  assessment  is  to  be 
made.10  Every  company  subject  to  such  taxation  must, 
within  thirty  days  after  each  franchise  is  acquired,  make 
a  written  report,  under  oath,  to  the  state  board.  In  the 
report  is  to  be  a  description  of  the  franchise,  any  obliga- 
tion upon  it  and  any  other  information  the  board  may  re- 
quire.11 The  board  meets  at  specified  times  to  hear  and 
determine  complaints,  with  the  provision,  however,  that 
such  determinations  may  be  reviewed  through  the  courts. 
This  law,  then  provides  for  a  tax  in  addition  to  any  pre- 
viously existing  tax,  to  be  assessed  upon  the  right  to  use 
a  public  thoroughfare  and  upon  the  fixtures  found  there- 
in. Such  property  is  considered  real  estate,  is  to  be  as- 
sessed by  the  State  Board  of  Tax  Commissioners,  whose 
determinations  are  subject  to  court  review.  The  law  has 
been  amended  at  minor  points  but  its  significant  features 
remain  unchanged. 

This  special  franchise  tax  has  been  much  discussed. 
The  press  was  at  first  generally  favorable  to  franchise 
taxation  but  was  inclined  to  find  fault  with  the  Governor's 
methods  of  procedure,  and  there  was  not  a  little  satirical 
comment  on  the  predicament  in  which  he  found  himself 
when  he  had  forced  the  passage  of  a  bill  which  he  would 
not  sign.  Public  sentiment  was  against  the  special  ses- 
sion ;  it  was  thought  that  the  Governor  might  better  have 
vetoed  the  bill,  and  permitted  the  matter  to  wait  over  till 
the  next  regular  session  of  the  legislature.  The  special 
session  was  deemed  a  measure  of  political  expediency, — 
to  save  the  Governor  from  the  humiliation  of  having  to 
veto  his  own  bill.  But  in  its  final  form  the  act  was  given 
at  the  time  the  almost  unanimous  approval  of  the  press  of 

10  The  taxing  officer  of  the  district  must  furnish  any  information 
required  by  the  State  Board  for  the  purpose  of  determining  the 
value  of  the  franchise.  A  copy  of  the  valuation  is  to  be  delivered 
by  the  clerk  to  the  assessors  within  five  days  after  he  receives  it 
and  they  are  to  enter  it  upon  the  assessment  roll. 

11  A  penalty  of  one  hundred  dollars  is  imposed  for  failure  to  make 
any  required  report  and  in  addition  ten  dollars  per  day  for  each 
day  the  failure  continues. 


1 56        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

the  state  and  even  of  the  country.12    Tammany  Hall  sent 
to  the  Governor  a  memorial  favoring  the  bill.13 

One  important  feature  of  the  law  is  its  definition  of 
special  franchises  as  "real  estate".  This  provision  was 
made  necessary  because  of  the  working  of  the  general  tax 
law  under  which  corporations  were  assessed  locally.  In 
the  assessments  of  personalty  debts  were  allowed  to  be 
deducted  or  "sworn  off."  Such  could  not  be  done,  how- 
ever, with  the  assessment  of  real  estate.  Under  this  law 
corporations  had  to  a  great  extent  escaped  taxation  upon 
their  capital  since  the  part  covered  by  bonds  was  an  in- 
debtedness and  could  properly  be  deducted.  Where  the 
bonds  equaled  or  exceeded  the  capital  only  the  real  estate 
was  left  to  be  taxed.  Had  the  special  franchise,  then, 
been  designated  as  personalty,  the  purpose  of  the  law 
would  have  been  defeated  to  a  great  extent  by  the  deduct- 
ion of  bonded  indebtedness  from  the  assessment.  Sena- 
tor Ford  emphasized  the  importance  of  this  feature: 
"The  main  virtue  of  the  bill  is  that  it  proposes  to  tax 
these  properties  as  real  estate  instead  of  as  personalty — 
that  means  that  whatever  tax  the  assessors  levy  must  be 
paid.  It  cannot  be  'sworn  off'  nor  can  indebtedness  be 
offset  against  it.     In  other  words  the  possessor  of  the 

"The  New  York  Times  may  be  cited  as  an  exception.  From 
the  beginning  it  criticised  the  principle  of  franchise  taxation.  The 
Commercial  and  Financial  Chronicle  took  the  same  attitude  as  the 
Times.  To  quote  from  the  Chronicle  {Public  Opinion.  Vol.  26: 
648)  "The  difficulty,  it  seems  to  us,  lies  deeper  than  any  general 
question  of  how  the  law  may  be  applied.  The  theory  on  which  the 
entire  measure  is  constructed  is  erroneous.  A  corporation  fran- 
chise is  not  real  estate  and  the  briefest  possible  discussion  of  the 
bill  has  shown  into  what  embarrassment  and  confusion  the  tax  ad- 
ministration will  be  thrown  by  insisting  upon  such  classification. 
The  case  simply  amounts  to  this — that  provisions  framed  for  one 
purpose,  and  peculiarly  adapted  to  that  purpose,  are  suddenly  and 
without  substantial  change,  applied  to  something  of  a  wholly  differ- 
ent nature." 

"New  York  Times,  May  12,  1899.  In  the  memorial  it  was  main- 
tained that  the  bill  was  intended  to  remove  inequality.  It  would 
reach  the  corporations  who  had  special  privileges  taken  by  right  of 
eminent  domain.  These  privileges  were  to  be  the  subject  of  taxation 
and  such  a  law  would  mark  a  great  advance  in  the  New  York  system 
of  taxation.  The  privileges  should  be  taxed,  it  argued,  since  they 
are  the  most  valuable  part  of  the  corporation  property.  Without 
them  the  rest  of  the  property  would  be  junk. 


SPECIAL  TAXATION  OF  PUBLIC  SERVICE  CORPORATIONS  157 

public  franchise  is  placed  in  the  same  position,  as  far  as 
the  tax  laws  are  concerned,  as  the  owner  of  a  house  and 
lot,  which  property  is  taxed  regardless  of  whether  it  is 
producing  revenue  or  not  and  without  regard  to  the  mort- 
gage that  may  be  upon  it,  even  though  that  mortgage 
covers  eighty  per  cent  of  the  total  value  of  the  proper- 
ty."14 

The  assessment  and  valuation  of  the  special  franchise 
has  proved  particularly  difficult.  The  law  as  first  passed 
by  the  legislature  had  left  the  assessment  to  local  asses- 
sors, but  in  its  final  form  this  was  given  over  to  the  State 
Board  of  Tax  Commissioners.  Senator  Ford  opposed  the 
centralization  of  assessment,  holding  that,  under  a  rule 
which  he  suggested,  local  assessors  would  have  no  diffi- 
culty in  arriving  at  special  franchise  valuation.15  The 
law  prescribed  no  particular  method  of  assessment,  such 
matters  being  left  to  the  discretion  of  the  tax  commission. 
Before  beginning  its  work  the  commission  asked  the 
Attorney  General  for  an  opinion  as  to  the  method  of  pro- 
cedure. This  was  given  by  Mr.  J.  Newton  Fiero,  counsel 
designated  for  the  purpose,  September  28,  1899. 

The  purpose  of  the  act,  he  thought,  was  to  subject  cer- 
tain classes  of  franchises,  and  those  only,  to  assessment ; 
it  did  not  give  the  right  to  assess  a  corporation  for  the 
privilege  of  exercising  its  right  to  exist  as  such,  or  for 
its  good-will,  or  on  the  choice  or  conduct  of  its  business. 
He  reviewed  the  New  York  court  decisions  relating  to 
the  valuation  of  corporate  property  and  franchises  as  well 
as  the  systems  of  valuation  used  by  other  states.  Some 
of  these,  he  pointed  out,  would  be  in  harmony  with  New 
York  decisions. 

He  concluded  that  the  practical  and  practicable  method 
of  arriving  at  the  entire  value  of  assets  with  a  view  to 
assessing  the  special  franchise  necessitated  a  considera- 
tion of  the  cost  of  the  real  estate,  and  of  the  earning  ca- 
pacity of  the  property  as  a  whole.    As  elements  going  to 

14  New  York  Times,  April  30,  1899. 

u  The  rule  suggested  by  Senator  Ford  was  practically  the  stock 
and  bond  method  of  valuation.  The  difference  between  the  value 
of  the  stock  and  bonds,  and  the  reproduction  cost  of  tangible  as- 
sets would  represent  the  value  of  the  public  and  special  franchises. 


1 58        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

make  up  such  values  by  showing  earning  capacity,  the 
value  of  the  capital  stock,  surplus,  and  bonded  indebted- 
ness must  also  be  considered.  In  addition  all  circumstan- 
ces which  tend  to  enhance  or  depreciate  the  value  of  cor- 
porate property  had  to  be  taken  into  account.  A  consid- 
eration of  such  factors,  modified  in  each  case  to  suit  the 
circumstances,  would  give  the  value  of  the  entire  corpo- 
rate property. 

When  this  value  is  determined,  however,  the  problem 
is  by  no  means  solved.  The  only  assessment  to  be  made 
was  of  the  "special  franchise"  together  with  the  "value 
of  the  tangible  property"  used  in  direct  connection  with 
it.  Obviously  deductions  from  the  entire  corporate  value 
were  necessary.  Indebtedness  could  not  be  allowed  to 
lessen  the  assessment  since  the  special  franchises  were 
classed  as  real  estate,  from  which  deductions  of  indebted- 
ness were  not  permitted.  Real  estate,  however,  which 
was  not  included  in  the  statuatory  definition  could  not  be 
assessed  as  a  part  of  the  special  franchise,  and  its  value 
must  be  deducted  from  the  entire  value  of  the  corpora- 
tion's property  and  franchises.  The  value  of  the  tangi- 
ble and  personal  property,  likewise,  it  was  necessary  to 
deduct.  Besides  these  items  the  general  franchise  to  be 
a  corporation  had  a  distinct  value,  as  well  as  the  choice, 
conduct,  and  good  will  of  the  business  which  values  could 
not  be  included  in  the  special  franchise.  In  short,  all  the 
property  which  did  not  come  within  the  definition  of  a 
special  franchise  must  be  deducted  from  the  total  valu- 
ation. 

From  these  considerations  he  concluded  that  "the  value 
of  a  'special  franchise,'  therefore,  is  arrived  at  by  ascer- 
taining the  value  of  the  entire  corporate  property,  taking 
into  consideration  all  the  elements  which  go  to  make  up 
such  value,  and  deducting  therefrom  the  value  of  the  per- 
sonal property  of  the  corporation,  of  so  much  of  the  real 
estate  as  is  not  connected  with  the  special  franchise,  and 
of  the  franchises  not  affected  by  this  amendment,  in  fine, 
by  deducting  from  the  total  value  of  corporate  assets  all 
the  intangible  and  tangible  property  not  part  of,  or  con- 
nected with,  the  special  franchise." 


SPECIAL  TAXATION  OF  PUBLIC  SERVICE  CORPORATIONS  1 59 

Mr.  Fiero  admitted,  in  the  conclusion  of  his  report, 
the  leeway  the  proposed  method  left  to  the  tax  commis- 
sioners, particularly  in  determining  the  value  of  the  good 
will,  conduct  of  the  business,  franchise  to  be  a  corpora- 
tion, and  the  value  of  the  intangible  franchise  not  tax- 
able. It  was  impossible,  he  thought,  to  adopt  rigid  rules 
of  valuation  for  property  the  value  of  which  depended 
on  so  great  a  variety  of  elements.  Such  rules  could  only 
be  general  in  character  and  must  be  subject  to  modifica- 
tion in  individual  cases.  Because  of  the  wide  discretion 
necessarily  vested  in  the  assessing  officers,  absolute  cer- 
tainty in  values  would  not  be  possible. 

The  Board  of  Tax  Commissioners  had  to  contend  at 
first  with  many  difficulties,  and  to  encounter  much  criti- 
cism. Frequent  inquiries  were  made  as  to  what  rule  was 
followed  in  making  a  special  franchise  assessment  and 
the  reply  that  it  was  impossible  to  use  any  one  rule  was 
naturally  not  deemed  satisfactory.  The  Board,  in  fact, 
found  it  next  to  impossible  to  perform  the  duties  requir- 
ed of  it.  The  task  of  placing  a  value  upon  every  rail- 
road and  trolley  crossing,  and  every  use  of  the  streets 
and  highways  by  other  public  service  corporations  in- 
volved an  enormous  amount  of  labor.  In  order  to  facili- 
tate assessments  the  legislature,  at  the  request  of  the 
board,  eliminated  from  the  special  franchise  class  all  uses 
of  public  thoroughfares  less  than  250  feet  in  length.16 
This  reduced  the  number  of  special  franchise  assessments 
by  about  1100  and  the  valuation  by  more  than  $10,000,- 
000.  But  it  was  not  long  before  the  Tax  Commissioners 
pointed  out  the  enormous  value  attached  to  short  cross- 
ings in  populous  centers,  and  asked  that  the  amendment 
be  modified.  The  250  feet  exemption  reduced  the  rev- 
enue and  involved  an  unjust  discrimination.17  The  leg- 
islature accordingly  included  in  special  franchises  all  uses 
of  public  thoroughfares  in  cities  and  incorporated  villages 
and  placed  the  assessment  under  the  jurisdiction  of  the 
State  Tax  Commissioners.18 

"New  York  Statutes,  1901,  Chap.  490. 

"Annual  Report  of  Board  of  State  Tax  Commissioners,  1906. 

18  New  York  Statutes,  1907,  Chap.  720. 


160        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

In  spite  of  the  difficulties  in  administering  the  tax,  the 
commissioners  approved  it  as  a  matter  of  justice  and  as 
a  source  of  increased  public  revenues.  Valuations  of 
corporate  properties  were  greatly  increased.  The  total 
value  placed  upon  the  special  franchises  of  New  York 
City  at  the  first  assessment  was  nearly  $290,000,000. 
The  special  franchises  of  some  individual  companies  are 
found  to  be  enormously  valuable.  For  the  Metropolitan 
Street  Railway  system  this  value  was  over  $55,000,000; 
for  the  Consolidated  Gas  Company,  over  $10,000,000;  for 
the  Third  Avenue  Street  Railway  system  over  $17,000,- 
000.  General  approval,  of  course,  attended  such  results 
of  the  law. 

This  statute,  however,  has  been  the  cause  of  an  enor- 
mous amount  of  litigation.  Values  were,  of  necessity, 
arbitrarily  determined  ,and  this  opened  the  door  for  com- 
plaints. The  constutionality  of  the  law  was  first  attacked. 
In  1903  the  Court  of  Appeals  defined  a  special  franchise 
as  "the  right  granted  to  a  corporation  to  construct,  min- 
tain  or  operate,  in  a  public  highway,  some  structure  in- 
tended for  public  use,  which,  except  for  the  grant,  would 
be  a  trespass/'  It  was  contended  that  the  home-rule 
provision  of  the  constitution  19  was  violated  by  placing 
the  assessment  of  special  franchises  in  the  hands  of  the 
State  Tax  Commissioners.  This  contention  was  reject- 
ed by  the  court,  which  held  that  the  statute  created  a  new 
system  of  taxation,  and  brought  within  its  range  a  new 
character  of  property  which  required  new  methods  of  val- 
uation. With  this  the  exercise  of  new  functions  arose 
which  had  never  belonged  to  local  assessors.  The  func- 
tions were  properly  committed  to  state  officers  whose 

"Article  10,  Section  2.  This  provides  that  "all  city,  town  and 
village  officers,  whose  election  and  appointment  is  not  provided  for 
by  this  constitution,  shall  be  elected  by  the  electors  of  such  cities, 
towns,  and  villages,  or  of  some  subdivision  thereof,  or  appointed  by 
such  authorities  thereof,  as  the  legislature  shall  designate  for  that 
purpose."  The  court  held  that  when  this  provision  was  invoked  in 
relation  to  taxation  it  should  be  considered  in  connection  with  the 
supreme  taxing  power  of  the  legislature  and  neither  should  be  con- 
strued so  as  to  embarrass  or  cripple  the  other.  The  right  to  create 
a  new  system  of  taxation  and  bring  in  property  of  a  new  character 
could  not  be  decried  upon  this  principle  and  should  not  be  withheld 
from  the  legislature. 


SPECIAL  TAXATION  OF  PUBLIC  SERVICE  CORPORATIONS  161 

duty  related  to  the  subject  of  taxation  in  all  its  phases 
throughout  the  entire  state  and  who,  with  wider  experience 
and  greater  opportunities  for  observation  than  local  asses- 
sors, would  be  able  to  grasp  the  new  scheme  of  taxation 
as  a  whole.  Such  action,  moreover,  would  be  free  from 
all  local  prejudices  of  color.  Other  contentions,  to  the 
effect  that  the  act  was  impracticable  and  incapable  of 
execution,  and  that  this  was  evidenced  by  the  failure  of 
the  commissioners  to  adopt  a  definite  rule  in  making  the 
assessment,  were  likewise  overruled.20 

A  number  of  cases  involving  the  methods  used  in  making 
the  assessments  have  come  before  the  courts.  That  of  the 
Jamaica  Water  Supply  Company  was  the  most  important. 
We  have  already  noted  the  method  suggested  by  the  court 
for  valuing  corporate  property.21  The  net  earnings  basis, 
it  will  be  remembered,  was  adopted.  To  determine  the 
value  of  a  special  franchise  the  court  would  have  the 
assessors  first  deduct  operating  expenses  from  gross  earn- 
ings. A  reasonable  return  upon  the  portion  of  the  capi- 
tal invested  in  tangible  property  was  also  to  be  deducted. 
The  capitalized  remainder  would  represent  the  value  to 
be  attributed  to  the  special  franchise.  Taxes,  except  the 
special  franchise  tax,  were  to  be  deducted  from  gross 
earnings  in  determining  net  earnings  as  well  as  a  proper 
amount  of  depreciation.  In  absence  of  evidence  to  the 
contrary,  six  per  cent  was  to  be  taken  as  a  fair  rate  of 
return  in  calculating  the  value  of  a  special  franchise. 
The  court  recognized  that  the  rule  was  not  infallible,  but 
thought  it  could  be  generally  applied.  If  the  calculations 
left  no  value  for  the  special  franchise,  it  would  be  con- 
clusive reason  for  rejecting  the  net  earnings  rule  and 
would  demand  the  adoption  of  some  other  method  of  val- 
uation. 

It  appears,  that  in  laying  down  this  rule,  the  court  took 
no  account  of  the  fact  that  other  franchise  values  besides 
the  special  franchise  have  to  be  reckoned  with.  The  other 
franchises,  to  be  sure,  are  not  taxed  locally  yet  the  total 

80  Metropolitan  Street  Railway  Company  vs  Tax  Commissioners, 
174  N.  Y,  417.    Affirmed  199  U.  S.,  1. 

n  Jamaica  Water  Supply  Company  vs  Tax  Commissioners,  196 
N.  Y.  39.    See  preceding  chapter,  p.  134. 


162        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

value  of  all  franchises  cannot  properly  be  imputed  to  the 
so-called  special  franchises.  The  rule  suggested  gives  at 
best  merely  the  whole  franchise  value  and  suggestes  no 
scheme  by  which  the  assessment  can  be  divided  into  sums 
representing  the  values  of  the  different  kinds  of  franchises. 
Neither  does  it  suggest  any  method  by  which  the  value 
of  one  special  franchise  may  be  separated  from  the  value 
of  other  special  franchises.  A  railroad  company,  for  ex- 
ample, may  have  special  franchises  in  a  number  of  tax 
districts  and  it  is  necessary  to  assign  separate  values  to 
the  franchises  in  each  district.  It  would  seem,  then,  that 
the  suggested  rule  fails  to  solve  the  problem  of  special 
franchise  assessment,  and  that  as  much  leeway  as  before 
is  left  to  the  tax  commissioners. 

Judge  Blackmar,  in  a  later  case,22  discounted  the  im- 
portance of  the  net-earnings  rule  in  special  franchise  val- 
uations. He  admitted,  of  course,  that  the  most  important 
single  element  in  determining  the  value  of  a  special  fran- 
chise is  the  earning  capacity  of  the  company.  But  no 
thoughtful  appraiser,  he  held,  would  deem  the  results  of 
the  business  for  a  single  year  conclusive  without  a  con- 
sideration of  many  other  matters.  The  real  value  of  a 
special  franchise  does  not  depend  upon  what  it  does  earn, 
but  upon  what  it  can  be  made  to  earn.  This  would  be 
the  way  a  person  who  contemplated  purchase  would  val- 
ue it.  Here,  then,  we  have  another  basis,  one  which  the 
judge  himself  characterizes  as  attended  by  too  many  com- 
plications to  be  of  direct  practical  use.  This  factor,  how- 
ever, he  thought  should  be  given  due  weight.  That  none 
of  the  methods  used  were  altogether  satisfactory  is  indi- 
cated by  the  number  of  cases  that  continued  to  come  be- 
fore the  courts. 

The  corporations  were  severely,  and  perhaps  unfairly, 
criticized  for  contesting  the  law.  The  Independent  at- 
tributed the  opposition  of  the  "interests"  to  Roosevelt's 
second  term  as  governor  to  this  law.  "But  his  franchise 
tax  law,"  it  said,  "was  so  strongly  affirmed  that  it  could 
not  be  shaken,  and  efforts  to  escape  its  requirements  will 

22  Queens  County   Water  Company  vs   Woodbury,  67   Miscellan- 
eous, 490. 


SPECIAL  TAXATION  OF  PUBLIC  SERVICE  CORPORATIONS  163 

do  the  companies  more  harm  than  good.  The  tax  is 
clearly  a  just  one,  Great  quantities  of  stock  and  bonds 
have  been  issued  upon  franchise  privileges  rather  than 
upon  actual  cash.  By  means  of  such  manipulation  large 
fortunes  have  been  acquired."  To  such  practices  it  at- 
tributed the  clamor  for  municipal  ownership  of  public 
utilities.23  Such  were  the  opinions  of  the  press  generally, 
which  seems  to  have  endorsed  Roosevelt's  statement  that 
the  principle  had  come  to  stay.  Governor  Odell,  however, 
favored  the  repeal  of  the  law  because  of  its  indefiniteness 
and  the  consequent  litigation.  He  recommended  the 
gross  earnings  tax  as  a  substitute.24 

One  obvious  defect  in  the  law  was  its  failure  to  pro- 
vide for  the  equalization  of  assessments,  which  had  to  be 
made  by  the  board  at  full  value.  In  the  Jamaica  Water 
Supply  Company  case,  cited  above,  the  court  held  that 
the  State  Board  of  Tax  Commissioners  had  no  power 
to  reduce  the  value  of  a  special  franchise  for  purposes 
of  equalization.  Reduction  could  only  be  made  by  the 
courts  where  such  property  had  been  assessed  at  higher 
proportionate  value  than  other  property  on  the  same  tax 
roll. 

During  the  first  eight  years  that  the  law  was  on  the 
books,  less  than  half  the  taxes  due  on  special  franchise 
assessments  were  paid,  pending  the  outcome  of  legisla- 
tion. The  Tax  Commissioners  had  from  the  first  asked 
for  the  power  of  equalization  and  the  Court  of  Appeals 
had  recommended  that  such  power  be  conferred.  The 
State  Conference  on  Taxation  held  in  Utica  in  191 1 
unanimously  adopted  a  resolution  recommending  the 
equalization  of  special  franchise  assessments  by  the  State 
Board.  Governor  Dix  in  his  message  of  191 1  referred 
to  the  enormous  amount  of  litigation  and  asked  for  an 
amendment  that  would  permit  the  tax  commissioners  to 
make  an  equalized  assessment.  Such  an  amendment  to 
the  law  was  finally  passed  in  191 1.25     The  State  Board 

28  The  Independent,  May  7,  1903. 

24  Governor  Odell's  message  to  the  Legislature,  1903,  Public  Papers 
of  Governor  Odell,  1903,  p.  12. 

25  New  York  Statutes,  1911,  Chap.  804. 


164        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

now  attempts  to  equalize  special  franchise  assessments 
with  real  estate  assessments  in  each  district. 

In  191 1,  975  writs  of  certiorari  were  taken  out  in  the 
courts  for  the  review  of  special  franchise  assessments. 
In  the  following  year,  with  the  amendement  in  force,  the 
number  fell  to  212.  But  this  number  is  so  large  as  to 
indicate  that  the  operation  of  the  law  is  still  far  from  sat- 
isfactory. Cities  and  towns  have  begun  action  in  cases 
where  they  thought  the  Commissioners  under  their  equal- 
ization powers  had  unduly  reduced  special  franchise  val- 
ues. The  possibility  of  inequality  still  exists  in  the  at- 
temp  to  equalize  the  special  franchise  value  to  the  per- 
centage which  the  assessed  value  of  other  real  property 
in  each  district  bears  to  its  full  value.  It  is  difficult  for 
the  commissioners  to  determine  just  what  is  the  relation 
between  the  assessed  and  full  value  of  other  real  prop- 
erty in  the  various  districts. 

The  board  of  tax  commissioners  expressed  the  hope 
that  the  equalizing  of  the  special  franchise  valuations 
would  largely  aid  in  bringing  local  assessments  of  real 
property  up  to  the  full  value  standard.  The  reduction  of 
the  special  franchise  valuations26  brought  forcibly  to  the 
attention  of  the  people  the  rate  at  which  real  property 
was  generally  being  assessed,  and  the  loss  that  came  to 
the  particular  tax  district  by  reason  of  assessments  being 
lower  than  full  value.  When  an  adequate  force  of  ap- 
praisers was  supplied,  the  Board  expected  to  be  in  pos- 
session of  sufficient  information  to  make  plain  to  the  as- 
sessors the  extent  to  which  they  were  violating  the  law. 
The  Commissioners  recognized  that  the  assessments  in 
many  localities  were  unequal,  but  they  lacked  positive 
proof  of  such  inequalitity  and  undervaluation. 

Taken  as  a  whole,  the  statute  has  proved  in  operation 
to  be  one  of  the  most  arbitrary  and  complicated  parts  of 
New  York's  already  far  too  complex  system  of  taxation. 
The  different  methods  and  "rules"  suggested  for  valuing 
the  franchises,  and  the  admitted  impossibility  of  framing 

"As  given  by  the  tax  commissioners  in  their  report  for  1912,  the 
total  valuation  of  special  franchise  for  1912  was  $601,988,675  and 
the  equalized  valuation  was  $533,790,692. 


SPECIAL  TAXATION  OF  PUBLIC  SERVICE  CORPORATIONS  165 

a  "rule"  fitting  all  cases,  points  to  the  conclusion  that  the 
fair  and  equitable  assessment  of  special  franchises  is  an 
impossibility.  The  net  earnings  basis  of  valuation  and 
its  difficulties  have  been  discussed  in  the  previous  chap- 
ter. Just  what  are  net  earnings  ?  What  shall  be  allowed 
for  expenses  in  each  case,  and  how  shall  the  rate  of  capi- 
talization vary  for  the  companies  operating  under  differ- 
ent conditions  of  hazard?  What  has  been  the  character 
of  the  management  in  this  or  that  particular  case  and 
what  allowance  must  be  made  for  managerial  ability  in 
making  the  assessments?  Railroads  in  the  streets  are  a 
greater  hinderance  to  public  use  than  are  gas  mains,  tel- 
ephone conduits,  etc.,  and  yet  there  are  many  cases  in 
which  larger  profits  must  be  imputed  to  the  latter.  Are 
the  commissioners  to  use  the  same  rule  and  basis  of  cap- 
italization for  all  companies?  How  much  of  the  earn- 
ings is  to  be  attributed  to  property  located  outside  the 
streets?  Are  the  prices  which  some  corporations  pay 
municipalities  for  their  franchises,  either  in  a  lump  sum 
or  annually,  to  be  taken  into  consideration?  What  part 
shall  the  fee  value  of  the  land  itself  occupied  in  the 
streets  have  in  the  assessment  ?  What  place  must  be  given 
to  the  possibility  for  future  earnings?  How  determine 
the  value  to  a  railroad  company  of  the  right  to  cross  the 
street  in  a  country  village  of  iooo  population? 

Problems  such  as  the  above  questions  suggest  and 
many  others  arise  under  the  application  of  the  law,  and 
with  a  slightly  different  application  in  each  case.  And 
when  we  consider  that  there  are  nearly  8000  special  fran- 
chises annually  to  be  assessed  and  equalized  with  the  as- 
sessed value  of  other  real  estate  in  the  district  where  the 
franchise  is  situated,  we  must  grant  the  utter  impossibility 
of  satisfactory  results.  Instead  of  making  the  tax  sys- 
tem more  simple  and  uniform,  as  had  been  urged  by  the 
reformers,  it  has  piled  complexity  upon  complexity.  It 
has  increased  revenues  in  some  places,  but  at  a  waste  of 
time  and  money  in  administration  and  litigation.  And 
all  this  has  not  afforded  uniform  and  just  treatment  to 
the  corporations,  for  under  the  statute  it  is  virtually  im- 
possible to  treat  all  alike.     The  assessment  must  be  arbi- 


166        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

trary  and  the  companies  have  no  way  of  knowing  in  ad- 
vance how  much  their  taxes  will  be.  It  also  increases 
the  burdens  connected  with  the  mere  payment  of  the 
taxes.  That  such  burdens  are  not  inconsiderable  is  shown 
by  the  fact  that  some  corporations  pay  as  many  as  5000 
separate  tax  bills. 

But  was  there  really  no  justification  for  the  measure? 
It  was,  of  course,  an  attempt  to  make  the  property  basis 
of  taxation  more  adequate  in  reaching  corporate  value. 
The  people  saw  companies  which  held  gratuitous  long- 
time or  perpetual  franchises  and  from  which  they  were 
coining  money,  and  on  which  they  were  paying  little  or 
nothing  in  taxes.  The  very  idea  of  the  public  franchise, 
in  so  far  as  it  means  a  franchise  to  serve  the  public,  seem- 
ed to  be  forgotten,  and  the  idea  that  such  a  franchise 
conferred  the  right  to  exploit  the  public  seemed  to  be  in 
vogue.  And  in  a  number  of  cases  there  were  facts  which 
went  far  to  justify  such  an  interpretation  of  the  situation. 

It  was  to  have  been  expected,  of  course,  that  franchises 
granted  by  the  public  without  special  safeguards  for  the 
public  interests  would  be  exploited  as  they  were.  When 
the  people  realized  the  value  of  these  special  grants  and 
sought  to  correct  the  evil  they  had  brought  upon  them- 
selves, no  weapon  seemed  so  readily  available  as  taxation. 
If  the  special  franchise  tax  cauld  be  made  to  take  the 
earnings  of  exploitation  and  be  kept  uniform  and  fair 
in  its  application,  there  could  be  little  objection  to  it.  But 
even  though  we  justify  the  special  franchise  tax  as  an 
attempt  to  take  the  "earnings  of  privilege,"  the  difficulties 
are  not  cleared  away.  It  still  remains  to  account  for  the 
"additional  franchise  taxes"  upon  the  gross  earnings  and 
dividends  of  some  classes  of  public  service  corporations. 
Then,  too,  the  inadequacy  of  the  annual  franchise  tax 
to  reach  intangible  values,  in  the  cases  where  it  applies, 
must  be  explained. 

The  modern  interpretation  of  the  idea  covered  by  the 
term  "public  franchise"  is  not  that  the  franchise  gives  a 
corporation  the  right  to  use  public  property  for  the  pur- 
pose of  gaining  an  income  from  it.  It  is  rather  a  priv- 
ilege granted  to  the  corporation  to  use  such  property  in 


SPECIAL  TAXATION  OF  PUBLIC  SERVICE  CORPORATIONS  167 

rendering  a  public  service.  The  service  is  not  expected 
to  be  rendered  without  compensation  and  the  public  must 
allow  a  reasonable  return  on  the  capital  used  to  render 
such  services,  but  not  on  the  value  of  a  free  gift  from  the 
public.  A  public  franchise  cannot  be  capitalized  against 
the  public.  But,  in  fact,  many  corporations  were  getting 
more  than  the  public  was  willing  to  allow  and  the  tax- 
ation of  surplus  profits  was  the  first  remedy  hit  upon. 
More  recently,  however,  a  better  and  saner  method  of 
establishing  just  relations  between  the  public  and  the  cor- 
porations has  been  introduced.  This  is  regulation  by  a 
public  service  commission.  This  commission  has  the 
board  powers  of  deciding  upon  a  fair  return  on  capital 
invested,  quality  of  service,  and  the  rates  to  be  charged. 
Under  regulation  the  values  now  represented  by  special 
franchises  tend  to  disappear.  If  regulation  were  perfect 
there  would  be  no  special  franchise  values.  Since  it  can 
thus  deal  with  the  use  of  franchises,  the  question  of  tax- 
ation resolves  itself  into  this :  are  public  service  corpo- 
rations to  be  viewed  as  existing  for  the  benefit  of  the 
users,  the  community  viewed  as  a  body  of  taxpayers,  or 
both?  If  for  the  former  then  the  commission  will  require 
low  rates,  and  there  will  be  nothing  left  (over  a  fair  re- 
turn) for  taxes;  if  "for  the  state,  then  higher  rates  with 
some  curtailment  in  the  use  of  the  utility;  if  for  both, 
moderate  rates  with  only  a  moderate  surplus  for  taxes. 

Under  a  system  of  perfect  regulation  there  is  no  doubt 
that,  if  the  public  service  corporation  pays  a  tax,  it  mere- 
ly acts  as  a  collector  of  that  tax  from  the  public.  The  net 
earnings  of  a  company  must  be  large  enough  to  allow  a 
fair  return.  In  ascertaining  the  net  earnings,  taxes,  along 
with  the  operating  expenses,  are  deducted  from  gross  re- 
ceipts. If  there  were  no  tax  the  total  income  of  the  com- 
pany could  be  reduced  by  the  amount  of  the  tax  and  their 
net  earnings  remain  unchanged.  With  the  tax  the  charge 
for  service  must  be  such  as  to  allow  a  fair  return  after 
its  deduction  from  gross  receipts.27    For  this  reason  many 

"This  is  only  necessarily  true  under  regulation.  A  tax  imposed 
upon  a  monopoly  where  prices  were  fixed  so  as  to  bring  the  highest 
net  return  might  have  no  effect,  or  one  not  in  proportion  to  the  tax, 
on  the  price  charged  for  the  service.     Rates  would  still  be  such  as 


168        DEVELOPM ENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

persons  now  favor  the  abolition  of  special  taxes  upon  pub- 
lic utility  corporations  for  these  increase  the  burden  upon 
the  consumer  of  the  service.  Such  taxes  are,  more  or 
less,  according  to  the  utility  in  question,  a  burden  upon 
a  particular  class.  A  tax  upon  street  railways,  for  ex- 
ample would  be  borne  in  large  part  by  the  middle  and 
lower  classes.  In  the  case  of  some  other  utilities,  steam 
heat  or  gas,  for  example,  the  opposite  may  be  more  nearly 
true. 

Because  of  the  necessary  burden  a  tax  places  upon  the 
consumer  of  a  public  utility  service,  some  have  advocated 
the  entire  abolition  of  taxes  upon  this  class  of  enterprises. 
Such  action  would  secure  cheaper  services  but  at  a  high- 
er tax  upon  other  assessable  property.  It  would  practi- 
cally amount  to  shifting  such  tax  to  the  owners  of  other 
property. 

Under  regulation,  public  utility  property  becomes  much 
like  other  property  so  far  as  a  means  for  raising  revenue 
is  concerned.  It  is  property  yielding  a  fair  return,  and 
so  should  neither  be  freed  from  taxes  nor  have  special 
taxes  applied  to  it.  The  most  logical  and  just  method  of 
procedure,  it  would  seem,  would  be  to  tax  such  property 
valuations  to  the  same  extent  that  other  property  is  tax- 
ed, and  in  such  a  way  as  to  equalize  the  burdens  on  this 
class  of  property  and  other  property.  The  proceeds  could 
be  applied  to  the  needs  of  the  state,  the  locality,  or  both. 
Such  a  tax,  however,  should  not  be  assessed  under  the 
guise  of  a  special  franchise  tax,  for  this  has  proved  com- 
plex and  confusing.  We  conclude,  as  in  the  preceding 
chapter,  that  the  present  system  should  be  simplified  into 
some  uniform  tax,  assessed  by  a  central  board.  Some  in- 
equalities, no  doubt,  would  exist  until  proper  regulation 
and  assessment  is  secured.  Such,  however,  would  tend  to 
disappear  with  time  and  experience.  Simplicity  would  at 
least  be  secured  and  no  greater  injustice  or  inequalities 
would  be  incurred  than  exist  at  present. 

to  bring  the  largest  net  return  to  the  company,  and  it  is  possible 
they  would  remain  the  same  as  before  the  tax  was  imposed. 


CHAPTR  IX. 

SUMMARY  OF  NEW  YORK  LAWS  TAXING  CORPORATIONS. 

I.    FOR  STATE  PURPOSES. 

A       DOMESTIC  CORPORATIONS. 

Organization  Taxes  (Section  180)  Every  stock  cor- 
poration incorporated  under  any  state  law  must  pay  a  tax 
of  one-twentieth  of  one  per  cent  upon  the  authorized  cap- 
ital stock.  A  like  tax  is  imposed  upon  any  subsequent 
increase  of  capital  stock.  The  minimum  tax  is  five  dol- 
lars. Banks,  building,  mutual  loan,  accumulative  fund 
and  co-operative  associations  are  exempt  from  the  tax. 
Railroads  need  not  pay  when  incorporated  but  must  pay 
before  they  receive  a  certificate  from  the  public  service 
commission.  In  case  of  consolidation  the  tax  must  be 
paid  only  on  the  capital  in  excess  of  the  amount  which 
has  previously  borne  the  tax. 

Annual  Franchise  Tax.  (Section  182)  Every  cor- 
poration, joint  stock  company,  and  association,  for  the 
privilege  of  exercising  its  corporate  franchise,  must  pay 
an  annual  tax  on  the  amount  of  capital  employed  within 
the  state  during  the  preceding  year.  The  amount  of  stock 
employed  within  the  is  the  same  proportion  of 
the  issued  stock  as  the  gross  assets  employed  in  the  state 
bear  to  the  entire  gross  assets.  If  the  dividends  amount 
to  six  or  more  per  cent  upon  the  par  value  of  the  stock  the 
tax  is  one-fourth  mill  for  each  per  cent  of  dividend  so  de- 
clared. 

If  the  dividends  amount  to  less  than  six  per  cent  and 
(a)  the  assets  do  not  exceed  liabilities,  exclusive  of  cap- 
ital stock,  or  (b)  the  average  price  at  which  the  stock 
sold  did  not  equal  or  exceed  par,  or  (c)  if  no  dividends 
were  declared,  the  tax  is  three-fourths  mill  per  dollar  on 
capital  employed  in  the  state.    If  the  dividends  have  been 

169 


170        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

less  than  six  per  cent  and  (a)  the  assets  exceed  liabilities 
exclusive  of  capital  stock,  by  as  much  as  the  par  value  of 
the  stock  or  (b)  the  average  selling  price  of  the  stock 
during  the  year  was  as  much  as  par,  the  tax  on  capital 
employed  in  the  state  is  one  and  one-half  mills  per  dollar. 
The  valuation  of  the  capital  cannot  be  less  than  (a)  the 
par  value  of  the  stock,  (b)  the  difference  between  assets 
and  liabilities,  exclusive  of  capital  stock,  or  (c)  the  aver- 
age price  at  which  the  stock  sold  during  the  year.  Where 
there  are  two  kinds  of  stock  paying  dividends  at  different 
rates,  each  kind  of  stock  is  taxed  as  if  it  were  the  only 
taxable  stock.  Any  corporation  not  taxable  under  the 
above  provisions  is  taxed  not  less  than  would  be  produced 
by  a  tax  of  one  and  one-half  mills  per  dollar  on  the  actual 
value  of  the  capital  stock  employed  in  the  state  or  on  the 
average  price  at  which  stock  sold  during  the  year. 

Some  corporations  are  exempt  from  the  annual  fran- 
chise tax.  (Section  183)  These  are  banks,  savings  banks, 
institutions  for  savings,  title  guaranty,  insurance  or  sure- 
ty corporations  and  trust  companies.  Laundering, 
manufacturing  and  mining  companies  are  exempt  if  at 
least  forty  per  cent  of  the  capital  stock  is  invested  in  prop- 
erty in  the  state  and  used  in  laundering,  manufacturing 
or  mining  business.  Agricultural  and  horticultural  as- 
sociations and  companies  owning  or  operating  elevated 
railroads,  surface  roads  not  operated  by  steam,  and  com- 
panies formed  for  supplying  water  or  gas,  for  electric  or 
steam  heating,  lighting  and  power  purposes  are  also  ex- 
empt from  the  tax. 

Additional  Franchise  Tax:  (Section  184)  All  steam 
surface  railroad  companies  and  all  canal,  steamboat,  ferry, 
express,  navigation,  pipe  line,  transfer  baggage  express, 
telegraph,  telephone,  and  palace  or  sleeping  car  compan- 
ies must  pay  an  annual  excise  tax  or  license  fee  of  five 
tenths  of  one  per  cent  upon  gross  earnings  within  the 
state.  The  earnings  considered  are  those  arising  from 
business  originating  and  terminating  within  the  state. 
Earnings  from  interestate  commerce  are  therefore  exclud- 
ed.    Ferry  companies  operating  between  the  boroughs  of 


SUMMARY  NEW  YORK  LAWS  TAXING  CORPORATIONS  171 

New  York  city  under  a  city  lease  are  not  subject  to  the 
tax. 

Other  Taxes  on  Transportation  and  Transmis- 
sion Companies:  (Section  185  and  186)  Companies 
owning  or  operating  elevated  railroads  or  surface  roads 
not  operated  by  steam  must  pay  an  annual  tax  of  one  per 
cent  on  gross  earnings  derived  from  all  sources  within 
the  state.  In  addition  they  must  pay  three  per  cent  upon 
the  amount  of  dividends  declared  or  paid  in  excess  of  four 
per  cent  on  the  actual  amount  of  paid  up  capital  employed. 
Companies  formed  for  supplying  water  and  gas  or  for 
electric  or  steam  heating,  lighting  or  power  purposes, 
must  pay  an  annual  tax  of  five-tenths  of  one  per  cent  on 
gross  earnings  derived  within  the  state.  Besides  this 
they  must  pay  a  tax  of  three  per  cent  upon  the  dividends 
declared  in  excess  of  four  per  cent  on  the  actual  amount 
of  paid  up  capital. 

Insurance  Companies:  (Section  187)  All  insurance 
companies  organized  or  formed  under  a  general  or  special 
law  of  the  state  must  pay  a  tax  of  one  per  cent  on  the 
gross  amount  of  premiums  received  during  the  year.  The 
gross  premiums  include  all  premiums  received  on  all  poli- 
cies, certificates,  renewals,  policies  subsequently  canceled, 
insurance  and  reinsurance  during  the  preceding  year,  and 
on  all  policies  issued  in  all  years  prior  to  the  preceding; 
year. 

Trust  Companies  and  Savings  Banks: (Section  188 
and  189)  Every  trust  company  operating  under  any  law  of 
the  state  must  pay  for  the  privilege  of  carrying  on  its 
business  in  such  organized  capacity  an  annual  tax  of  one 
per  cent  on  the  amount  of  its  capital  stock,  surplus  and  un- 
divided profits.  Savings  banks  must  pay  for  the  privilege 
of  exercising  corporate  form,  an  annual  tax  of  one  per 
cent  on  the  par  value  of  surplus  and  undivided  earnings. 

Stock  Transfer  Tax:  (Section  270)  A  tax  of  two 
cents  on  every  $100  face  value  is  imposed  on  all  sales  or 
agreements  to  sell  or  memoranda  of  sales  of  stock.  The 
person  making  the  sale  must  affix  and  cancel  the  stamps 
to  pay  the  tax.     Stamps  are  prepared  by  the  State  Comp- 


1  72        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

trailer  and  their  sale  is  limited  to  banks  organized  under 
the  New  York  laws,  under  the  national  banking  act  or  to 
a  duly  authorized  agent  of  the  Comptroller.  Penalties 
are  imposed  for  failure  to  pay  the  tax,  failure  to  cancel 
stamps,  illegal  use  of  stamps  and  for  failure  to  register. 

B.    FOREIGN   CORPORATIONS 

License  Tax:  (Section  181)  Foreign  Corporations, 
for  the  privilege  of  carrying  on  business  in  a  corporate 
capacity  in  the  state  must  pay  a  license  fee  of  one-eighth 
of  one  per  cent  on  the  amount  of  capital  stock  employed 
within  the  state  during  the  first  year  of  carrying  on  busi- 
ness. Any  subsequent  increase  of  capital  employed  in  the 
state  is  subject  to  the  tax.  The  amount  of  capital  employ- 
ed in  the  state  is  taken  to  be  such  part  of  the  issued  capital 
stock  as  the  gross  assets  employed  in  any  business  within 
the  state  bear  to  the  total  gross  assets.  The  State  Tax 
Commission  fixes  the  amount  of  capital  upon  which  the 
tax  is  to  be  paid.  Banking  corporations,  fire,  marine, 
casulty  and  life  insurance  companies,  co-operative  fra- 
ternal insurance  companies  and  building  and  loan  associa- 
tions are  exempt  from  the  tax. 

Annual,  Franchise  Tax:  (Section  182)  Foreign 
corporations  pay  the  annual  franchise  tax  on  the  amount 
of  capital  employed  in  the  state.  The  tax  is  computed  in 
the  same  way  as  the  tax  on  domestic  corporations.  The 
amount  of  the  stock  upon  which  to  compute  the  tax  is  de- 
termined by  the  proportion  of  assets  found  in  the  state. 

Foreign  Insurance  Companies:  (Section  187)  All 
insurance  companies  formed  under  laws  of  any  other 
state  of  the  United  States,  except  fire  and  marine  insur- 
surance  companies,  pay  one  per  cent  of  the  gross  amount 
of  annual  premiums.  All  insurance  companies  organized 
under  laws  of  foreign  countries,  except  those  doing  a  life 
health  or  casulty  business,  pay  one  per  cent  on  the  gross 
amount  of  annual  premiums.  The  tax  on  fire  and  marine 
insurance  companies  organized  under  the  laws  of  a  for- 
eign country,  however,  is  five-tenths  of  one  per  cent  of 
the  annual  premiums.    If  any  state  imposes  heavier  taxes 


SUMMARY  NEW  YORK  LAWS  TAXING  CORPORATIONS  173 

upon  a  New  York  company  than  normally  imposed 
in  New  York,  companies  from  that  state  are  taxed  to  the 
same  extent  as  are  New  York  companies  during  business 
there. 

Tax  Upon  Foreign  Bankers:  (Section  191)  Every 
foreign  banker  doing  business  in  the  state  is  required  to 
pay  an  annual  tax  of  five  per  cent  on  the  amount  of  inter- 
est or  compensation  earned  or  collected  on  money  loaned, 
used  or  employed  in  the  state. 

Other  Taxes  for  State  Purposes:  All  companies 
paying  the  above  taxes  ,except  the  organization  tax,  are 
exempt  from  assessment  and  taxation  upon  their  personal 
property  for  state  purposes.  (Section  205)  Since  there  is 
a  small  directly  apportioned  tax  for  state  purposes  a  part 
of  this  falls  upon  corporations  since  their  real  estate  is 
legally  assessed  for  state  purposes.  Very  little  personal 
property  is  assessed  since  proision  is  made  only  for  plac- 
ing real  estate  and  capital  stock  on  the  assessment  roll.  Ac- 
cording to  the  statute  none  of  the  locally  collected  tax. 
except  real  estate  taxes,  could  be  taken  for  state  purposes. 

II.  FOR  LOCAL  PURPOSES 

(Sections  11  and  12)  Real  estate  and  personal  prop- 
erty of  corporations  is  to  be  assessed  and  taxed  by  local 
assessors.  Real  estate  is  taxed  at  situs  while  personal 
property  is  taxed  at  the  place  of  the  principal  office.  In 
the  instructions  for  making  out  the  assessment  roll,  how- 
ever, provision  is  made  only  for  placing  on  the  roll  real 
estate  and  capital  stock. 

Taxation  of  Banks:  (Section  24)  Bank  shares  are 
to  be  assessed  to  the  holder  at  the  place  where  the  bank 
is  located.  The  assessment  and  taxation  is  not  to  be  at 
a  greater  rate  than  is  made  or  assessed  on  moneyed  capi- 
tal in  the  hands  of  individual  citizens  of  the  state.  The 
value  of  shares  is  found  by  adding  together  the  amount 
of  the  capital  stock,  surplus  and  undivided  profits  and 
dividing  the  result  by  the  number  of  outstanding  shares. 
When  a  bank  is  in  liquidation  the  value  is  found  by  divid- 


1 74        DEVELOPMENT  OF  CORPORATION  TAXATION,  STATE  OF  NEW  YORK 

ing  the  actual  assets  by  the  number  of  shares.  Individual 
bankers  must  report  the  amount  of  capital  invested  in  the 
business  and  have  it  assessed  as  personal  property.  The 
tax  upon  bank  shares  is  one  per  cent  of  the  value.  No 
deduction  is  allowed  for  the  personal  indebtedness  of  the 
share  holders. 

Special,  Franchise:  (Sections  43-49)  The  use  of 
public  property  to  the  extent  of  250  feet  or  more  in 
length,  and  any  use  in  a  city  or  incorporated  village,  is 
assessed  and  taxed  as  real  estate.  Valuations  are  made 
and  equalized  by  the  State  Board  of  Tax  Commissioners. 
Taxes  which  companies  already  pay  for  the  use  of  public 
property  are  deducted  from  special  franchise  assessments. 


175 


A  PARTIAL  LIST  OF  SOURCES  USED  IN  PREPARING 
THIS  THESIS. 

Annual    Reports    of    New    York    State    Comptrollers,    1847-1915. 

Annual  Reports  of  New  York  State  Assessors  and  State  Board 
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